US-expatriates have to file income tax returns by June 17th. But any US Tax owed to the IRS has to be paid by April 15th. This means that US-expats have to do a tax-calculation by April 15 to make sure that they are not owing any taxes to US tax authorities.

More information will be provided by our co-operation partner Greenback Tax Services.

After World War II Germany became an immigrant country. Today more than 10 million people of Germany’s population are immigrants or second generation children of immigrants. Immigration has also its tax impacts.

A special tax problem occurs quite often with individuals form the USA or Anglo-Saxon countries when they come to live in Germany. Quite a few of them are beneficiaries of trusts.  The German tax regime of trusts is very unfavourable. This is due to two facts.

Germany’s civil law does not know this legal form. Therefore there exists uncertainty about the legal status of trusts. The second reason for the unfavourable taxation is the fact that German individuals tried to avoid high German tax burdens in the sixties and seventies of the last century by setting up trust in tax havens. This resulted in a punishing anti-avoidance tax legislation. Unfortunately German tax law does not distinguish between Germans who try to avoid taxes and foreigners coming to Germany. Trusts which have been set-up to benefit the latter were often not constructed to avoid taxation. Or if so this was legally accepted by their domestic tax system.

The tax regime of a trust in Germany depends mainly on its legal structure. If the settlor or a beneficiary is the beneficial owner of trust’s funds the trust will be treated as transparent for tax purposes. The high fiscal court of Germany (Bundesfinanzhof / BFH) ruled in a case regarding a Liechtenstein Stiftung as follows. In this case the settlor was able to control the trust. He had the right to appoint or remove trustees and to transfer all funds back to him or to third parties. The BFH classified the Liechtenstein Stiftung as transparent. The same tax treatment shall apply for trusts.

The tax situation of beneficiaries of transparent trusts being resident in Germany is as follows:

• The beneficiary’s part of trust income will be subject to German income taxation if not denied by a double taxation treaty. Especially dividends, interests and other income from capital funds are subject to German taxation. Business or rental income might be tax free under provisions of the respective double taxation treaty.
• Transfers of funds of the beneficiary to the trust or repayments to the beneficiary will not be subject to German income or inheritance and gift tax.
• A serious problem can be the crediting of foreign taxes at source. This can apply for instance if the trust receives dividends from foreign sources and the foreign country imposes a withholding tax on these dividends. German tax regulations or provisions of the respective double taxation may deny the full crediting of the withholding tax on German income tax.

A beneficiary of an in-transparent trust might face far more severe tax implications if being resident in Germany. This especially applies for irrevocable trusts. The following tax implications might follow:

• The transfer of funds to the trust by the settlor or beneficiary is subject to German gift tax. The very unfavourable tax class III is applicable (low allowances, tax rates between 30% and 50% on transferred funds).
• Payments of the trust to the beneficiary who is resident in Germany can be subject to German income taxation under certain circumstances. And all payments of the trust will be subject to German gift tax. This extensive tax regime might result in a double taxation if payments are subject to German income and gift tax.
• And the above mentioned problem of crediting foreign withholding taxes against German income tax is even more severe.
• There are special provisions for so called family trusts. But in general they are not applicable for beneficiaries coming from abroad.
• Double taxation treaties might provide a certain support against extensive double taxation. This is especially the case where German double taxation treaties with countries from the Anglo-American world have special provisions regarding the taxation of trust. But there is little support in regards to inheritance and gift tax since Germany’s only double taxation treaty in this respect has been agreed with the USA.
• Citizens of EU-member states such as Great Britain or Ireland might be able to seek help in front of German courts if they are subject to extensive taxation. The German regulations might not be in line with European freedom rights.

Author: Peter Scheller, Somann & Scheller, www.somannscheller.de

Politically Germany is one of the driving forces of European unification. But all good intentions seem to vanish if money is involved. In this respect Germany’s finance minister is no different from others. He is responsible for drafting tax laws with doubtful EU-comparability.

A good indication that German tax law is not in line with EU law is the sheer number of cases in front of the European Court of Justice. No other European country produces more cases in regard to direct taxes. In the last ten to fifteen years Germany lost a lot of cases. And it looks as though many more are to follow. A German professional magazine publishes every year a list of tax provisions which might not be in line with EU law. This year’s list names 146 different provisions! And this list does not contain potential cases on indirect taxes such as Value Added Tax (VAT) or excise taxes on energy, tobacco or alcohol.

German tax law discriminates in certain cases against foreign enterprises as well as individuals. Anti-discrimination provisions of the EU-treaty are

• General freedom right/Right to choose residence
• Freedom for employees
• Freedom of trade
• Freedom to conduct services
• Right of establishment
• Freedom to transfer capital funds

For business activities e.g. the following German regulations can be subject to court cases:

• Deduction of foreign losses
• German thin capitalisation-regulations
• Capital gains taxation if assets are transferred abroad
• Taxation at source of dividends and profit distributions
• German CFC-regulations
• German restructuring regulations

The following German taxation of individuals may breech EU freedom rights:

• Deduction of foreign losses
• Deduction of personal allowances
• Taxation of foreign investment funds
• Extensive double taxation concerning inheritances and gifts

Enterprises and individuals from other EU-countries have good chances to argue against discriminating tax regulations. For enterprises and individuals resident in non-EU countries such as the USA or Switzerland, it is much more difficult to achieve protection of EU anti-discrimination jurisdiction. But it is not impossible. This is due to the fact that the Freedom to transfer capital funds provides cover to respective world-wide activities. Companies and individuals from non-EU countries who are subject to German taxation and feel discriminated by German tax legislation should always check whether appeals against tax assessments could prove to be successful.

But to be fair it has to be said that in recent years a lot of German tax provisions have been brought in line with EU law by the German government. But in many cases it was only after Germany lost cases in front of the European Court of Justice or German fiscal courts.

Glossary

Author: Peter Scheller, Somann & Scheller, www.somannscheller.de

Traditionally Germany’s economy is based on small and medium-sized enterprises. These companies employ over 60% of the German work force. And these companies have a fair share in Germany’s position as second biggest exporting country in the world. Enterprises of other countries who want to establish business relations with German enterprises should not only concentrate on the big multinational enterprises. In certain industry sectors medium-sized companies can be the better choice to find a suitable business partner.

Large German companies have the legal form of an Aktiengesellschaft (AG), the German equivalent to an Incorporation in the Anglo-American legal systems. Small and medium sized businesses often choose the form of a Gesellschaft mit beschränkter Haftung (GmbH), equivalent to a Limited liability company. Both legal forms are corporations with own legal identity.

But a lot of small and medium sized enterprises in Germany are legally organised in the form of a trading partnership (Personenhandelsgesellschaft). This very often confuses business partners especially from Anglo-Saxon countries since there partnerships are seldom used for business purposes. The translation of the term Personenhandelsgesellschaft is a little bit misleading. A better translation would be not-incorporated trading company with partners as shareholders.

The basic forms of partnerships are the offene Handelsgesellschaft (oHG) and the Kommanditgesellschaft (KG). These legal forms require the unlimited liability of all partners (oHG) or of at least one partner (KG). Because of the unlimited liability of partners these legal forms are seldom used.

But often used is a GmbH & Co. KG. This is a combination of a GmbH and a KG. The KG is the operating unit. The GmbH’s only purpose is to be unlimited liable partner of the KG. Shareholders of GmbH and KG are in general the same persons.

With this legal structure owners or investors can avoid unlimited liability but also use the less strict legal framework of partnerships.

The tax regime for corporations and partnerships is different.

Corporations (GmbH and AG) are subject to corporation income tax (Körperschaftsteuer / tax rate: 15%) and solidarity surplus charge (Solidaritätszuschlag / tax rate: 5.5% of corporation tax) and the municipal business tax. The combined tax rate on profits is between 28% and 32%. Dividends derived by individuals are taxed in general at a rate of 25% plus solidarity surplus charge. 95% of dividends to corporations are tax exempt. The latter applies also for foreign corporations.

Partnerships (oHG or KG) are treated for tax purposes as transparent entities. Consequently profits of partnerships are taxed as business income by individuals. Individual income is imposed at progressive income tax rates. Maximum income tax rate is 45% plus solidarity surplus charge. If partners are corporations their profit shares are taxed as regular income. The partnership itself is subject to business tax.

Business tax (Gewerbesteuer) is imposed by the municipalities. The taxable income for business tax is generally determined by the taxable income with certain adjustments. Municipalities can fix tax rates individually. This results in higher tax burdens in the big German cities and lower rates in surrounding areas. Sometime it might be suitable to situate own business activities outside of the big cities. The business tax rates vary from 13% to 17%.

Germany does not allow free choice of the tax regime for corporations and partnerships such as the US check-the-box-treatment.

Glossary

Author: Peter Scheller, Somann & Scheller, www.somannscheller.de