A US shareholder of a US company who intend to relocate to Germany is often worried about his/her personal tax situation. Of course, this requires careful tax planning for the individual. However, it is important to note that there are special tax pitfalls for the US company and the other US shareholder who might be still resident in the USA. While this article refers to the German side, a relocation of the US shareholder might also affect the US side so that US tax advice is recommendable as well.
Here are 5 tax pitfalls that accompany me in practice:
It is commonly known that a fixed place of business serving the company’s business purpose is seen as a permanent establishment. A US shareholder who is living and working for the US company in Germany may constitute such a permanent establishment for the US company. This can be the case, either by renting business premises or in some cases also by working remotely from home. Keep in mind that under certain conditions, a home office can also qualify as a permanent establishment.
Whether or not a permanent establishment is given depends from the activities performed by the US shareholder in Germany as well. If he/she is one of the managing directors or a person with full authority to conclude contracts in the name of the US company then a permanent establishment is likely given.
Being a US shareholder of the company, it is unlikely that his/her activity fall under the existing exceptions (e.g. preparatory or auxiliary character activities) that can avoid a permanent establishment in Germany. However, it is worthwhile to check the job description in detail.
With a permanent establishment in Germany, the US company will become subject to German taxation with tax filing obligations in Germany. Of course, the double taxation will be avoided according to the US-German Double Tax Treaty. However, the US company has to face administrative burden.
Often, there are still US resident shareholders working and living for the US company in the USA. With a German-resident shareholder, most tax issues usually affect the US company. However, in some situations this could be different. This is the case when the US company is seen as a transparent partnership for German tax purposes e.g. a US LLC.
If the US company is qualified as a partnership for German tax purposes, the special taxation for partnerships apply in Germany. On principle, the German permanent establishment of the partnership is liable to German trade tax itself (on average 15%) and each member of the partnership is liable to income taxation based on the profit share. This means that the US shareholders that are qualified as partnership members would be liable to German taxation on their profit share with the obligation to file German tax returns in Germany (limited tax liability).
For more information regarding the US LLC, feel free to subscribe to my guide “5 things US business owners need to know when living in Germany – on the example of the US LLC”.
To my knowledge, a US company is tax resident in the USA once organized and created under the law of the United States. In Germany, a company can be tax resident either by having its seat or its management in Germany.
In case the German-resident US shareholder is the only manager of the US company then the tax residency of the US company will switch over to Germany at the time of the relocation. The US company then becomes tax resident with all tax obligations and more tax issues in Germany and the USA. With more than one US shareholder, there is of course the option to change the management to a US based shareholder before the relocation to avoid the undesirable tax consequences.
Nevertheless, it is important to know that in case of such double residency, the existing US-German Double Tax Treaty unfortunately does not give relief. In case of a double resident company, both states have to find a solution by consultation. We all know that such a path is time-consuming. This administrative trouble should be avoided by a tax planning before the US shareholder is relocating.
With one US shareholder being resident in Germany, any corporate restructuring is complex. A restructuring is often required in a M&A transaction e.g. when investors are interesting in buying the company. In most cases, the US shareholders are willing to sell a part of their shares and restructure the company in a favorable way.
While the German Transfer Tax Law supports tax-neutral transactions under certain conditions, cross-border transactions with the USA are, however, not covered.
In one of my latest cases, a tax-neutral restructuring in the USA was not in favor for my German-resident client. The restructuring together with the sale to the investors lead to an overall tax burden of 90% of the cash payment my client should receive. Together with the US advisors, we could manage to restructure the company in a favorable way for the persons involved including my client.
Keep in mind that any corporate restructuring which is in favor for the US resident shareholders and the investors might lead to severe tax consequences for the German-resident US shareholder. In this case, a restructuring should always consider German tax advice as well.
In Germany, we have the so called CFC-rules – rules for controlled foreign companies. Currently, there are some law changes in this regard. However, to keep it short: the German CFC rules could have an impact on the German-resident shareholder if certain conditions apply.
German tax resident shareholders could be subject to taxation on the income of a CFC if
- The CFC is domestically controlled. That means that the German tax resident shareholder hold a stake of more than 50% in the CFC
- The CFC realizes passive income (e.g. interest income, license income etc.)
- The CFC’s income is subject to taxation at a rate of less than 25% (low taxed income)
In case the conditions are met then the US income of the CFC is taxed at the level of the German resident shareholder – depending on the level of the participation. This CFC income is qualified fictitiously as dividend income for the German shareholder, which is taxed with his individual tax rate.
This taxation mostly affects the German-resident shareholder. Nevertheless, the US company is under focus as well (e.g. kind of business, tax rate).