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us expat tax guide – germany

What does owning a German company mean for US tax filing?

For US citizens or green card holders in Germany who own a limited company, such as a GmbH, US tax filing requirements become more complex. The key factor is the percentage of ownership in the company.

Shareholders with 10% or more ownership must report their stake using Form 5471, and detail their involvement and the company’s financials.

How does majority ownership affect tax obligations?

Owning more than 50% of a company, either individually or collectively with other US citizens, classifies the business as a Controlled Foreign Corporation (CFC). This status may trigger US taxes on the company’s net income, regardless of whether profits are distributed.

However, the corporate tax paid in Germany can often offset US tax liabilities due to the higher tax rates in Germany.

How do the transition and GILTI taxes affect US shareholders of foreign corporations?

The Transition Tax, or Section 965, mandates a one-time tax on the deferred foreign earnings of certain overseas corporations owned by US shareholders, treating these earnings as if they were repatriated to the US.

In contrast, the GILTI Tax (Global Intangible Low-Taxed Income) targets US shareholders of Controlled Foreign Corporations (CFCs), requiring them to annually report and pay taxes on their share of the CFC’s undistributed, non-previously taxed profits.

To mitigate the GILTI Tax, a US shareholder might consider transferring partial ownership to a non-US person, thus potentially reclassifying the corporation’s status to avoid being deemed a CFC. This strategy requires careful legal and trust arrangements due to the complexities of shareholding and control. It is highly recommended to get a tax professional’s advice

Section 962 offers an alternative by allowing individuals to elect to be taxed at the corporate rate of 21% on foreign income, compared to the higher personal tax rate, potentially reducing the tax on foreign company profits to between 10-13%.

This election can make foreign tax credits more accessible, offsetting US tax liabilities in cases where the foreign corporate tax rate exceeds 21%. However, this benefit comes with the caveat that future distributions as dividends may incur additional US taxes.

For small business owners, the implications of GILTI and the Transition Tax can be significant, often leading to double taxation without actual financial gain.

To learn more about GILTI taxes, you can visit our page here: Gilti Tax on Foreign Business Income Explained.

Should I file as a foreign corporation or self-employed?

Choosing between filing as a foreign corporation or as self-employed affects how complicated and expensive your US tax filing will be. If you choose to be seen as self-employed, you can report your business income on a simpler form, Schedule C, instead of dealing with the more complicated Form 5471 for foreign corporations.

What steps should I take before setting up a company in Germany as a US citizen?

Before establishing a company in Germany, it’s crucial to consult with a US tax professional. Early advice can help navigate the US tax implications and potentially avoid costly complications.

For those who have already established a company, exploring the option to be taxed as a disregarded entity could simplify tax filing and reduce costs.

If I own a small German company, can I have the IRS treat me as self-employed?

Generally, yes, if you own 100% of the company. You need to get permission from the IRS by filing Form 8832.

We strongly recommend getting professional US tax advice before filing Form 8832, as they will be able to provide you with strategies, helping you optimize your business based on your specific situation.

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