Ouch, ouch ouch….. starting or owning a US corporation – or just any corporation (equivalent) anywhere – while in German to keep US and German tax consequences apart is an area of great misunderstandings and you might have just tied yourself to a plethora of unexpected tax consequences.
The first set of tax consequences pertains to the level of the actual corporation. If your corporation is actively run from Germany, e.g. because you can and actually do exercise managerial powers over the company from Germany, then any company profit, which can be attributed to your input and decision-making will likely be considered a permanent establishment profit and subject to the German corporate and trade tax regime as well as subjected to the solidarity charge. This is a bummer because if you have not removed this profit portion from the US tax base you are essentially paying twice on the same profit.
The second set of tax consequences pertains to you as the corporation owner. Let’s assume you owned the corporation once you moved to Germany, then you “imported” the capital base and the company value to Germany. So, while you’re in Germany successfully developing your foreign corporation, the value of your business grows. When you want to leave Germany again, depending on a set of circumstances, the value increase can be subject to the German exit taxation. This is a real bummer because Germany will consider your interest in the company sold, while you have not actually sold it at all and impose capital gains tax. Essentially you will be owing tax on cash you never received – that can make for a serious liquidity shortage…
The third set of tax consequences is the German “controlled foreign corporation” tax regime. It applies if your corporation is located in an area where the effective tax rate is below 15% and hinges on your input to be successful. Depending on a slew of other aspects to be checked on, the German tax office might consider the company profit as income directly attributable to you and to be taxed as investment income. Again, this means a tax payment on money you never received.
If you now feel like the way to go is to just not report your interest in a foreign corporation to the Germans we can only strongly advise against it. The reasons are as follows:
- Your actions could plain and simple amount to tax fraud.
- Since all three levels of tax consequences are attached to a slew of requirements, there are just as many options to work around them
So, if you have any interest in a US or foreign corporation, please discuss your situation with the taxperts, so we can figure out how to best assist you.