So, today we want to talk about a ruling from the Federal Finance Court BFH from 2021. This once again concerns the classification of a US LLC as a partnership or corporation. [Music] There have already been several decisions by the BFH, including the last one from 2021. What we are now discussing here in no way affects the so-called zero-tax or exempt LLCs, which, for example, B. digital nomads, non-dom taxpayers or similar people who live in tax-favorable countries can set up a business. This is actually about taxpayers with unlimited taxes in Germany who participate in US LLCs, for example. B. to make investments in the USA. Basically, the problem with the US LLC is that it does not exist as a comparable legal form in the European Union, especially in Germany, which is why the tax office sometimes has difficulty with the so-called legal type comparison, which involves whether the company is a partnership or a partnership is to be classified as a corporation. A corresponding classification can be fatal if it turns out differently than you planned. It can actually result in you having to pay up to almost 70% in taxes on the company's profits. We want to explain why this is the case here. First question again, what exactly is an LLC? A US LLC, Limited Liability Company, is a hybrid company. Under corporate law , it is to be viewed as a corporation; under tax law, it is to be viewed as a partnership. This means that in terms of tax law it is similar to a GbR or a GmbH & Co. KG, the company does not actually pay any taxes itself, but the taxes are paid by the shareholders on their personal tax return. Now, however, the US LLC can also ultimately be structured as a corporation in the USA, it can then opt to be treated as a corporation with the IRS, so it then pays corporation tax and in Germany you would then pay withholding tax on the profits, but the usual one Treatment is actually like a partnership. And the BFH ruling also concerned an LLC, which, according to the owner, was ultimately supposed to be a partnership, but was then classified as a corporation by the German tax office. The mistake that the US LLC entrepreneur, who was a person based in Germany, made here is that he unfortunately drafted the statutes of the LLC incorrectly, we'll get to that again in a moment . As a result, the tax office then classified the company as a corporation, which led to fatally high taxation in Germany. We'll take a closer look at exactly how it's put together. Basically, our recommendation to all clients who want to do business in the USA is to use a C corporation, a capital company or if you absolutely want to use a partnership, which can also have tax advantages, no question, use a limited partnership, a so-called one LP. This is structured like a German GmbH & Co. KG, there are no problems whatsoever when comparing legal types. So, now I'll load the BFH page here. Here we now have the website where the judgment is described. You see from 2021, so not very old. Here is a brief summary of what it is about. So the company is registered as a limited liability company in Colorado, it invests in US real estate. The member, the only member, moved to Germany. He assumed that the company would be classified as a partnership in the USA and also in Germany. What does that mean specifically? He pays profits to the LLC in the USA, which means he personally files a tax return in the USA, declares the profits of the LLC there and then does not have to pay any further taxes in Germany according to the double taxation agreement. The point here was that the shareholder, the member, ultimately made a distribution for himself, which was a withdrawal for him, namely on December 31, 2018 in the amount X. We don't know the exact amount. So now it's all getting a bit confusing, a bit surreal, because, fatally, the company then submitted a capital gains tax declaration to the tax office. This is completely wrong here. So, he then recognized this mistake and then lodged an objection a short time later, and then a certain ball started rolling on the tax office's side. The LLC then reported to the tax office that, based on the type comparison, it should not be classified as a corporation, but rather as a partnership. The amount that he had distributed is therefore a withdrawal, on which no further tax is due in Germany according to the DTA. The tax office then checked it and said, no, it is a corporation, the basis for which is the company's statutes, the so-called operating agreement. So, there is a BMF letter from 2004 and it deals with various topics and gives various indications as to when such a company should be viewed as a partnership and when as a corporation. There are things like centralized management and representation, limited liability, free transferability of shares, distribution of profits by distribution resolution, raising capital, unlimited life of the company, distribution of profits and formal incorporation requirements. What does that mean exactly? So if you set out the following topics in the Operating Agreement, which is a purely private law contract that is not published anywhere and that your lawyer can draw up, as follows , then it indicates that the company is a corporation. So, if the managing directors are not also the shareholders, it looks to the tax office that it is a corporation. If liability is limited to the company's assets, it looks like a corporation. If the shares are freely transferable, it looks like a corporation. If profits are allocated by annual shareholder resolution, it looks like a corporation. If the shareholders have to make a contribution, it looks like a corporation. If the life of the company is unlimited, it looks like a corporation. And if the profits are distributed according to the size of the shareholding, it looks like a corporation. An overall picture is determined from these seven indicators and the tax office uses this to determine whether it is a corporation or a partnership. In this case, too many criteria applied to a corporation, so the tax office says it is a corporation. So I'll say it again, it's about the operating agreement, the statutes. You are completely free to decide what is in there. So it would have been no problem at all for this owner to draft these statutes accordingly. And that's how it happens for a lot of people, we always have clients who continue to make the same mistakes and then suddenly find themselves with gigantic tax liabilities. And these tax liabilities arise as follows. Let's take the example from Colorado. So, let's assume that this LLC now generates rental income in the USA, let's say for example. E.g. 100,000, and then the owner pays taxes on it in the USA, let's say 25%, so it's 25,000, he takes the remaining 75,000 out of the company and assumes that he doesn't have to pay any further taxes on it, according to the DBA Germany USA. But if the tax office says that it is a corporation, then the 25,000 in taxes that he has already paid in the USA will ultimately not be taken into account or will be viewed as corporate tax or some other tax. Then he has to pay the full German withholding tax and solidarity surcharge on the 75,000 that he has paid out , which corresponds to another 26, 27%. This means that he suddenly pays twice as much in taxes and, in practice, possibly almost 50%. It then becomes more dramatic the higher the profit is. We had just said 25,000, multiply the profit by a few 100,000, maybe half a million, a million, Then the tax in the USA goes up relatively. Then at some point you'll put e.g. E.g. in California, let's say at 40% or so overall, or maybe even 45%. If you then add in the 25 to 26% that you have to pay in Germany, you are almost at 70%. And all because you didn't draft these statutes, this operating agreement, correctly. So you see, the consequences can be fatal. If you want to invest in the USA and invest in companies there, then I would always recommend that you carefully examine your options. I know exactly how it works in the USA, I've lived there long enough. The entrepreneurs there are very self-confident, as are the lawyers, but they have zero, zero knowledge of international tax law, none at all. That means they are all totally convinced of the LLC and say it's great, we really want the LLC, it's particularly good for us and they can't even imagine what problems a foreign investor could have with it. Don't let the Americans run you over. Don't let yourself be run over, but tell the Americans, I can't easily use an LLC in Germany. To be honest, even with the right operating agreement, there are still residual risks that the company will be classified as a corporation, which is why many tax advisors, lawyers, etc., including us, advise not to set up an LLC, but rather to set up goes to the safe side and sets up an LP, i.e. a limited partnership, or a corporation. So tell your business partners, wait, wait, wait, I ca n't easily use an LLC. Maybe there are options then, so maybe you could e.g. B. then set up another company in the USA that participates in the LLC. That might be a possibility. Or you can convince your business partners to use another company, but please note, as I said, that the consequences for you as a person with unlimited tax liability in Germany could potentially be fatal from a tax point of view. If you need advice on this topic, on choosing the right legal form or have perhaps already made the mistake and now don't know how to act, I invite you to contact us and book a consultation. I'll put the link in the description here. We are very experienced and have very good lawyers and tax advisors in the USA and also in Germany who are familiar with the topic. I would be happy to explain the whole thing to you in more detail in a consultation and look forward to getting to know you there. Are you an entrepreneur, freelancer or investor? Have you been moving abroad for a long time? Take the first concrete step today towards a future with more money and more freedom. Book a consultation with Sebastian and his colleagues. Our law firm helps clients like you legally reduce your tax burden, build and protect wealth, and maximize your personal freedom. Benefit now from our expertise and our network. Go to mandating.com and become a client of our law firm.