Tax treatment of US companies in Germany


The legal qualification and taxation of US companies in Germany, such as Limited Liability Companies (LLCs) or Subchapter Corporations (S-Corps), can be challenging. One example showing the differences in qualification and taxation can be seen in the different criteria applied for the qualification as a corporation versus a partnership for tax purposes.

The ATAD II regulation, which targets hybrid structures, is currently a hot topic. One challenge, in this context is the taxation of disregarded entities in cross border activities. The ATAD II regulation results in, at the very least, additional compliance costs but might also lead to the denial of expenses.

Regardless of the ATAD II regulation, the taxation of an LLC or an S-Corp in Germany is often quite different to the taxation of those same companies in the US.


Due to the flexibility and the limitation of liability, LLCs are a popular choice when setting up a company in the US. In the US, an LLC that is created by two members can either be treated as a partnership or as a corporation. The treatment depends on the checkbox selected at the time of creation.

This election is not binding or obligatory for the German tax offices. According to the Federal German Fiscal Court, whether an LLC is taxed as a partnership or as a corporation must be decided on independently by the German tax offices. Therefore, the tax offices have issued a list of criteria that has to be applied in each case. These criteria, such as management, liability, distribution of profits etc., enable the tax offices to compare the LLC more easily in question to a German partnership or a German corporation.

As a result, there are scenarios in which the LLC is taxed as a partnership in the US and as a corporation in Germany, or vice versa.

Recently, a court ruling introduced a new dynamic regarding the taxation of an LLC in Germany. In this case, the sole shareholder of an LLC that did not elect to be taxed as a corporation, moved to Germany. Later, a bank transfer to the private account of a shareholder was made. The shareholder did not consider this payment to be a taxable distribution (dividend) of a corporation, but as a non-taxable refund. Since the LLC was taxed as a partnership in the US, he considered this taxation to be right in Germany as well. However, that was not the case.

The court ruled that the LLC is to be taxed as a corporation, regardless of the taxation status in the US. When applying the provided criteria for comparison, the LLC had more in common with a German corporation than with a German partnership, meaning it will be taxed as such. As a result, the shareholder and the LLC are to be taxed in the US and in Germany. In some cases, the overall tax rate can add up to 50% or more.

This court ruling will open up new discussions and focus more attention on structures that involve an LLC. Therefore, we recommend examining those structures and making the appropriate adjustments, if needed.


Similar questions are raised with the taxation of an S-Corp in Germany. The S-Corp is a corporation that can elect to be taxed as a partnership. Regardless of this election, the S-Corp is always taxed as a corporation in Germany.

Therefore, if the S-Corp pays the personal taxes of the shareholders, the payment is taxed as a hidden distribution in Germany. Tax treaty benefits might not apply due to the differing qualification of the S-Corp in the US and in Germany.

These two examples show that there are additional tax developments to be aware of regarding the taxation of US companies in Germany with more always on the way.