Advice for someone in my situation in Germany

[pamparana]

Hello all,

I am glad to come across this forum and this is my first post, so please be gentle

We recently moved to Germany from the UK with our 3 year old son and then my wife basically decided to divorce and separate from me. After a bitter child custody battle, which drained my money and energy, I managed to get equal shared custody of my son. The flip side is that I am stuck in Germany for the unforeseeable future.

My setup is as follows:

I have a well paying job in Germany where I pay my full taxes and everything is clean on that front.

I also had a decent consulting gig on the side which used to net me 10K/month (before taxes). The company was based in UK and also registered in Germany and I was paying full taxes here. Now, my ex-wife was also listed as a director of the company and I was then forced to close it. This is where now things are interesting.

I am still doing the work for the client and the invoices are piling up since January this year. They are happy to keep the money in a separate savings account and can release it when I have a setup. Now, given that I have to rebuild my finances and everything as I have pretty much lost everything in divorce, I was wondering if there is some setup where I can maximize/optimize my earnings. I am pretty pessimistic about this as I am stuck in Germany due to my kid but I thought I would ask just in case there is something I can do.

 

[Sols]

Nothing you can do about it that would be legal and long-term sustainable. Set up a German company if you want (limited liability, potential tax deferral) or do the work directly as yourself.

You have the option of setting up a company in for example Cyprus or Isle of Man, appoint local directors, and pretend like you're just a shareholder getting paid dividends. Structures like that work in many cases. But if the tax authority comes asking and starts poking and prodding, they are likely to assess that you effectively control the company and the company therefore is tax resident in Germany and must pay taxes like a German company. On top of that, you'd be looking at fines and penalties or even prison time if sufficiently severe.

Keep it simple and play by the rules. Probably wouldn't hurt to discuss with a local tax adviser about how to optimise deductions and incentives that might apply in your case.

If relocating to for example Cyprus or Malta is or becomes an option, you can do a lot more there to lower your tax bill.

 

[pamparana]

@Sols Thanks for the frank and honest advise. Yes, like I said I was not very optimistic.

What about if I want to use the earnings of the company as a retirement nest? So, I do not touch the money (not ideal) till my kid is grown up and moving is an option?

 

[CaptK]

For now I would set up a new UK entity and pay yourself a salary for what you need and pay tax. You can invest the profits back into the business or use that Company as a holding company.

You could partner with someone who doesn't live in the UK and set up an LLP therefore whatever you share holding is what you pay tax on. Your partner if he lives in a non tax jurisdiction then no tax is applicable and you can leave the profit in the company account until you need it.

 

[pamparana]

@CaptK Thanks for the reply. I am based in Germany and I think the laws are that I am liable for full CT in Germany unbless I have misunderstood your post. Would that be lagal given that the German laws ask you to pay full taxes in Germany if you are resident there?

 

[Sols]

For now I would set up a new UK entity and pay yourself a salary for what you need and pay tax. You can invest the profits back into the business or use that Company as a holding company.

The company becomes tax resident in Germany.

Prior to Brexit, though, it was quite common for expats in Germany to form UK companies rather than bother with the massive headaches German bureaucracy causes. So it's a well-understood setup.

You could partner with someone who doesn't live in the UK and set up an LLP therefore whatever you share holding is what you pay tax on. Your partner if he lives in a non tax jurisdiction then no tax is applicable and you can leave the profit in the company account until you need it.

Only the partner's portion wouldn't be taxable. @pamparana would still have to declare and pay tax on his portions of the earning. You need to be careful about being too creative with deferrals.

If we assume that the LLP would be treated the same as a KG or other German partnership, tax is calculated even on retained earnings. No deferral possible.

What about if I want to use the earnings of the company as a retirement nest? So, I do not touch the money (not ideal) till my kid is grown up and moving is an option?

Very doubtful, but run the idea by a German tax adviser. What you're describing is tax deferral which is something normally only applied as an exception in Germany, and tax is owed on retained earnings regardless.

 

[pamparana]

@Sols Thanks for such a detailed clarification. Much appreciated. I will try and find a tax advisor. If you or anyone has any recommendations, I would greatly appreciate it.

 

[CaptK]

The company becomes tax resident in Germany.

Prior to Brexit, though, it was quite common for expats in Germany to form UK companies rather than bother with the massive headaches German bureaucracy causes. So it's a well-understood setup.

That is understood

Only the partner's portion wouldn't be taxable. @pamparana would still have to declare and pay tax on his portions of the earning. You need to be careful about being too creative with deferrals.

If we assume that the LLP would be treated the same as a KG or other German partnership, tax is calculated even on retained earnings. No deferral possible.

If the partner is neither German or UK resident and their jurisdiction is more tax efficient like Georgia on a territorial basis then the profits can stay in the LLP.

Very doubtful, but run the idea by a German tax adviser. What you're describing is tax deferral which is something normally only applied as an exception in Germany, and tax is owed on retained earnings regardless.

His portion is taxable but the partners is not a concern of the German authorities.
@pamparana will be liable as you said but his partner won't.

 

[Sols]

If the partner is neither German or UK resident and their jurisdiction is more tax efficient like Georgia on a territorial basis then the profits can stay in the LLP.

Sure, but the partner that is resident in Germany likely causes the partnership to be relevant for German tax law and, as such, the German resident partner's portion is taxable even if retained.

That would only not be the case, if the German authorities for some reason decided to treat a UK LLP differently than how they treat domestic partnerships. And Germany isn't a place you go to for favorable tax rulings.

 

[Marzio]

Sure, but the partner that is resident in Germany likely causes the partnership to be relevant for German tax law and, as such, the German resident partner's portion is taxable even if retained.

What if the german partner had 0% in the LLP? In the partnership agreement he could state that decisions are taken unanimously (so he doesn't lose control).

 

[Sols]

What if the german partner had 0% in the LLP? In the partnership agreement he could state that decisions are taken unanimously (so he doesn't lose control).

That's not how partnerships work. Even if that were possible, he could then take out exactly 0% of the LLP's profits.

So it's kind of like going to the Coca Cola HQ and demanding dividends without owning any shares.

 

[Marzio]

That's not how partnerships work. Even if that were possible, he could then take out exactly 0% of the LLP's profits

That's exactly how partnership works, check this LLP partnership agreement template builder.

A partner could have any percentage, even 0%.

You're right, he could not take out any profits but that's the whole point of this structure.

0% profits = 0% taxes to pay

He said he has a full time job that pays the bills.

He only needs a vehicle to accumulate profits tax free.

Here you have it.

If he needs to take out money from the LLP he could just open a TransferWise account, get a debit card that he can use to pay for hookers.

 

[Sols]

A partner could have any percentage, even 0%.

You're right, he could not take out any profits but that's the whole point of this structure.

But he wouldn't be entitled to any either. Again, it's like deferring taxes on income you never earned.

If you change the partnership in the future, you're likely going to be considered committing tax fraud. 0% interest in a partnership as a tax evasion mechanism won't hold up against scrutiny.

He might end up being considered an employee of the LLP rather than a member, so we're suddenly involving payroll and income tax law in the UK and Germany. Plus corporate tax in Germany, if things get nasty.

He said he has a full time job that pays the bills.

He only needs a vehicle to accumulate profits tax free.

Here you have it.

It's only tax free if the structure remains unquestioned and undiscovered by the German authorities, even after he's left Germany. They won't have any qualms about going after him after he's left Germany, if it's an easy case and the amounts are worth pursuing.

You haven't discovered some great loophole. Only a somewhat convoluted structure that may or may not work simply through lack of discovery.

 

[Marzio]

You know what? You are probably right. Do you think that structuring the partnership with 5% or a credible percentage of the profits so he could pay some taxes will make the tax office less suspcious?

 

[Sols]

It's about intent, not specific numbers, especially if we're talking about a country like Germany. Whether you give 0%, 5%, or 45% but the person in the end gets more than what was declared after some creative changes in membership interest/profit share, it's at risk of being considered tax fraud because the intent was to not pay taxes in a manner that's contrary to the law.

These kind of arrangements might work in less aggressive and less sophisticated jurisdictions (combined with leaving the jurisdiction).

 

[JohnLocke]

@Sols Thanks for such a detailed clarification. Much appreciated. I will try and find a tax advisor. If you or anyone has any recommendations, I would greatly appreciate it.

You would like to try to contact TTP AG in Germany

Steuerberater und Wirtschaftsprüfer Flensburg | ttp.de

ttp: Kanzlei für Steuerberatung und mehr in Flensburg, Schleswig, Süderbrarup, Husum, Neumünster und Berlin.

www.ttp.de

They are good and really professional.

 

[Marzio]

after some creative changes in membership interest/profit share

He doesn't necessarily need to change the partnership agreement, when he will leave Germany he could simply open a joint bank with his partner to get access to profits.

Or, an even better option would be to move to another EU state before moving to a territorial tax country so that Germans most likely will do nothing because of the EU freedom of movement law.

Furthermore a LLP is most likely treated like an opaque entity in Germany, meaning he will pay taxes only when he receives money from the partnership.

I'm not saying that he could potentially defer paying taxes indefinitely but it is surely better to pay taxes when you get money in your bank account instead that paying taxes when you made profits on paper.

I think if properly structured this could be the best option for him.

But all of those assumptions are based on the premise that someday he will leave Germany.

 

[pamparana]

You would like to try to contact TTP AG in Germany

Steuerberater und Wirtschaftsprüfer Flensburg | ttp.de

ttp: Kanzlei für Steuerberatung und mehr in Flensburg, Schleswig, Süderbrarup, Husum, Neumünster und Berlin.

www.ttp.de

They are good and really professional.

Thanks for the recommendation. I will get in touch with them.

 

[Marzio]

I will get in touch with them.

Hey @pamparana let us know if you present them the LLP solution. Please update the thread in case.

 

[pamparana]

I will. I will need to find someone who can speak in English as I am originally from Italy and do not speak very good German yet but hopefully I will find a good solution.
I will update here but it might be a few weeks till I get enough advise on this.