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What are the US tax implications of owning a German company?

If you’re a US citizen or green card holder and own a German company, such as a GmbH, you face more complex tax filing requirements. 

Usually, these requirements are due to your ownership percentage: Shareholders with 10% or more ownership must report their shares using Form 5471, detailing their role and the company’s finances.

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How does majority ownership impact your tax obligations in the US?

Owning more than 50% of a company, either alone or with other US persons, designates the business as a Controlled Foreign Corporation (CFC). This classification can trigger US taxation on the company’s earnings, even if those profits are not distributed. 

However, typically, the corporate tax paid in Germany may offset some of the US tax liabilities due to Germany’s generally higher tax rates.

What are the transition and GILTI taxes, and how do they affect US shareholders?

  • Transition Tax (Section 965): This one-time tax applies to the deferred foreign earnings of specific overseas corporations as though these earnings were repatriated to the US.
  • GILTI Tax (Global Intangible Low-Taxed Income): This targets US shareholders of CFCs, requiring them to report and pay taxes annually on their share of the corporation’s undistributed, untaxed profits.

To potentially reduce GILTI liability, US shareholders might consider altering ownership structures or utilizing Section 962, which allows individuals to be taxed at the corporate rate (21%) on foreign income, rather than at a higher personal tax rate. 

Given these complexities, small business owners especially may face significant tax burdens. For detailed guidance on managing GILTI taxes, visit this resource: Gilti Tax on Foreign Business Income Explained.

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

Choosing how to file affects both the complexity and the cost of your US tax obligations. Filing as self-employed allows you to use Schedule C for a simpler reporting process, whereas operating as a foreign corporation necessitates the more intricate Form 5471.

What preparatory steps should be taken before starting a company in Germany as a US citizen?

Before setting up a business in Germany, engaging with a US tax professional is essential. Proper early planning can help you understand the tax implications and avoid future pitfalls. For existing businesses, considering taxation as a disregarded entity may simplify your tax situation and reduce filing complexities.

Can a small German company be treated as self-employed for US tax purposes?

Typically, if you own 100% of a German company, you may opt to be treated as self-employed by the IRS, requiring the submission of Form 8832. 

However, consulting with a tax professional is crucial before making this decision to ensure it aligns with your overall tax strategy and compliance requirements. They can provide tailored advice and strategies best suited for your specific business scenario.

Why partner with a specialist Expat accountant?

Living outside of the US can make your tax filing requirements complicated. To ensure you pay the minimum amount of taxes, it’s critical to work with an accountant who understands every aspect and avenue for reducing your tax liability. We have a dedicated team of tax accountants who work exclusively with US expats earning and investing in Germany. Partnering with a specialist expat accountant can help you navigate complex tax regulations and optimize your tax situation.


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