• Tax-Trap LLC - How Germany Analyzes the Nature of U.S. LLCs for German Tax Purposes (German)
  • November 11, 2013 | Authors: Steven H. Thal; Florian von Eyb
  • Law Firm: Phillips Nizer LLP - New York Office
  • This latest issue of "Zur Information" alerts German members of a U.S. Limited Liability Company (“LLC”) that the combination of elements of a corporation with elements of a partnership found in a U.S. LLC is foreign to German law and German tax authorities are not bound by an LLC’s check-the-box election to treat the LLC as a partnership for tax purposes. Instead, the German Finance Ministry will analyze each LLC individually to determine whether under German principles of law, it is structured more like a German corporate entity or like a German partnership. A determination that an LLC is considered a corporation under German law principles, while it may be treated like a partnership for tax purposes in the U.S., results in double taxation. Germany would tax revenues from the LLC, like corporate dividends, and the tax burden between the U.S. and Germany would potentially add up to more than 50%. The article outlines the criteria that the German Finance Ministry applies in their analysis of an LLC to distinguish between a corporation and a partnership. It encourages German members of a U.S. LLC to consult their attorney to structure new LLCs or amend existing LLCs in their operating agreement in accordance with these criteria in order to qualify as a partnership under German law and avoid German corporate income taxes and double taxation.