German national, moved to tax-heaven, US LLC for software consulting/enginnering?

[drn]

Hello OffshoreCorpTalk!

I'm new! I love it here. It's an awesome forum. Free minds, free people in a obscure world of lockdowns. I was self employed in Germany as a software engineer and consultant. While I want to pursue different things in the long term, it's a good way to make an income.

I hope to find somebody here to answer the Germany related question. I already asked my tax advisor but he needs to ask a couple of friends because he usually never deals with such things.

So where I reside now, I pay only a little amount of taxes and its not income based. I would like to have clients in Europe and because I know the market well in Germany, I would love to stay engaged there, but the German law defines something like "wirtschaftliche Interessen" (economic interests) in §2 AStG there is the point:

(3) Eine Person hat im Sinne des Absatzes 1 Nr. 2 wesentliche wirtschaftliche Interessen im Geltungsbereich dieses Gesetzes, wenn
...
ihre Einkünfte, die bei unbeschränkter Einkommensteuerpflicht nicht ausländische Einkünfte im Sinne des § 34d des Einkommensteuergesetzes sind, im Veranlagungszeitraum mehr als 30 Prozent ihrer sämtlichen Einkünfte betragen oder 62 000 Euro übersteigen oder
...

So you have a "economic interest" if you have incomes (>30% from total income) that are not foreign, this makes you taxable on the german income for 10 years after you have left.

Do you think a US LLC is a viable protection against it, that is legal, without any problems? So could a US LLC invoice german clients without triggering this law? The law talks also about "intermediate corporations" (§ 5 Zwischengeschaltete Gesellschaften), so that's why I'm asking. Maybe I'm lucky and somebody can give me a good answer to that? Or am I banned to do business there?

Further questions regarding the US LLC would be:

• What state is best for software development & consulting with out creating a nexus for foreign clients or US clients?
• How to charge VAT to EU & UK from the US LLC? reverse charge to B2B?
• If it's not the LLC what structure would be best to sell Apps?
• Are there hidden costs associated with US LLCs?
• Should I take a totally different approach to it?

 

[CaptK]

I think that applies if you started your company in Germany and moved.
I haven't translated it but I would assume so

 

[ih8socialism]

Hello,

first of all make sure to really cut off all ties with Germany. Also you are not "unbeschränkt Einkommenspflichtig" in germany if you reside somehwere else and have a proper residence and most likely Germany will recognize the LLC as a GmbH anyways. Best would be if you talk to your Steuerberater about this subject.

- Wyoming, New Mexico, Florida in the end it doesn't really matter imo
- No VAT applies if you charge EU customers from the US
- LLC is fine to sell Apps
- Only tax attorny once a year and the virutal office costs

Depends on where exactly you reside now and what your further plans are. If you want to stay in a low tax country (For example certain GCC countries) you could also go with a local setup.

May I ask in what country you are located now?

 

[drn]

Hi! I'd rather not disclose it. It's totally under the radar, but I heard Nomad Capitalist name it.

But there is a probability that the LLC would be seen as a "Personengesellschaft" and then it could be a problem, if the works are used "verwertet" in Germany right?

 

[invisibletardigrade]

There are a few very dangerous pitfalls that you need to be afraid of.

Pitfall #1: Tax residency in 3 jurisdictions, on the personal level and on the LLC level and double-taxation treaties.

It's possible that both you and your LLC are tax resident in $LTC, the US and Germany. As far as Germany is concerned, you can avoid tax residency by cutting all ties. This means you need to opt to become a “taxation foreigner”. As a tax foreigner, you can keep your German passport but you cannot vote in German elections. You also shouldn't live in Germany because moving back to Germany would cause you to loose your tax foreigner status. The LLC also shouldn't have any connection to Germany. As far as the US is concerned, the LLC can't cut ties because it's incorporated there. As far as $LTC is concerned, I'm not sure. Problem is also that Germany and the US will apply the world income principle to your income, i. e. any income worldwide is subject to taxation. This means that you and the LLC will potentially be subject to double or triple taxation. This issue can only be worked around using one or more double-taxation treaties. You will need to use the US-$LTC tax treaty and if you (still) have tax residency in Germany, you will also need the US-DE and DE-$LTC tax treaty. Now hopefully, all of these treaties exist because if one of them is missing, you may have a problem.

Pitfall #2: Taxation status of LLCs

LLCs can be taxed as corporations, partnerships or as an establishment of its sole member.

In the case of transparant taxation (i. e. partnership or establishment of sole member), the LLC doesn't pay any taxes. Instead, the LLC's income will be considered your personal income and you have to pay taxes on it. This may have unwanted side-effects on your personal tax declaration because it can make you personally tax resident in a jurisdiction you don't want to be tax resident in.

In the case of taxation as corporation, the LLC is treated as a corporation. This means that the LLC has to pay income tax (US) and corporation tax (Körperschaftssteuer) in Germany (assuming the LLC is tax resident in Germany).

Once you've settled for either transparant or as-corporation taxation, you may wonder what you need to do to achieve that status. In the US, this is very straight-forward: You send a letter to the IRS requesting that your LLC be treated as either corporation or transparantly. Done. In Germany, however, things are not that easy. Problem is that 1) in Germany, you have no right to decide whether you want your entity to be taxed as corporation or transparantly, and 2) that an LLC (Haftungsbeschränkte Personengesellschaft) is an entity that doesn't exist in Germany: An LLC is a partnership-like entity but is able to have features which would usually be unique to corporations. The tax office (Finanzamt) in Germany will conduct a legal type comparison (Rechtstypenvergleich) to determine whether your LLC is a corporation-like entity or a partnership-like entity. This is done by examining the organization documents, looking for corporation-like and partnership-like features. So in order to control whether your LLC is treated as a corporation or a partnership, you need to draft the whole organization document with the legal type comparison (Rechtstypenvergleich) in mind. If you ignore German tax law at this stage, you may not only end up with an entity that has the wrong tax status but (if it comes to the worst) you may even end up with a special form of double taxation: You need to make the US and the German tax status *match*. If they mismatch, you will end up with an entity that is taxed as corporation in the US but as partnership in Germany or vice versa. In this scenario, you will be unable to use any double-taxation treaty because taxes are applied to different subjects. The third jurisdiction, $LTC makes this even more complicated as I don't know how LLCs are taxed in that country.

 

[invisibletardigrade]

As far as VAT is concerned, you need to be aware that VAT is an indirect tax (indirekte Steuer). I. e. the taxation subject (Steuerpflichtiger) is different from the taxation debtor (Steuerschuldner). If you're selling services, VAT can be applied to non-EU entities remotely. In this case, tax must either be paid by the seller or VAT reversal must be used (for B2B).

 

[fshore]

Pitfall #2: Taxation status of LLCs

You have an incorrect understanding of taxation of llcs in the US.
You don't have to send to send a letter to irs to request it to be treated as disregarded, that is standard.
As it's disregarded you are taxed (in the US) without regards of the llcs, in the same way as if the llc didn't exist.

 

[boomy]

(3) Eine Person hat im Sinne des Absatzes 1 Nr. 2 wesentliche wirtschaftliche Interessen im Geltungsbereich dieses Gesetzes, wenn
...
ihre Einkünfte, die bei unbeschränkter Einkommensteuerpflicht nicht ausländische Einkünfte im Sinne des § 34d des Einkommensteuergesetzes sind, im Veranlagungszeitraum mehr als 30 Prozent ihrer sämtlichen Einkünfte betragen oder 62 000 Euro übersteigen oder

It says it pretty clear, your business has to be offshore 100% with substance in the offshore jurisdiction, otherwise they will refuse to accept it. The tax law or policy is the same as in most other EU countries.

 

[CaptK]

I asked a German friend in Dubai how he continued to do business in Germany from Dubai.

His answer

 

[drn]

As far as VAT is concerned, you need to be aware that VAT is an indirect tax (indirekte Steuer). I. e. the taxation subject (Steuerpflichtiger) is different from the taxation debtor (Steuerschuldner). If you're selling services, VAT can be applied to non-EU entities remotely. In this case, tax must either be paid by the seller or VAT reversal must be used (for B2B).

Thank you! Yes, what I've found is that I would write a netto invoice with a note stating "reverse charge may apply" or something like this. Thank you for your long answer. I think you have written with me staying Germany in mind, true? I'm already out, thank god!

I asked a German friend in Dubai how he continued to do business in Germany from Dubai.

His answer

Yes, that would be interesting. Although the UAE have their own little tax heaven vehicle, so he probably uses this.

I just asked a second question, as I have a new idea how to make it more solid.

 

[PhantomOf ThePits]

Hi,
thank you for the thread, thats what I was looking for.

Just want to double-check so I understand correctly:
- Dubai company 'delivers' consulting to German Company
- B2B Consulting

1) In that case the German company needs to pay 19% VAT as they 'import' my services from non-EU?
or
2) Me as a Non EU/Non Reverse Charge Company needs to register in Germany for a VAT number and then they can pay net without VAT?

Thank you for your reply and have a good evening

 

[fshore]

They have to account for the vat. They don't pay it, and they can deduct it so they don't actually pay the vat, if they are vat registered.

 

[PhantomOf ThePits]

They have to account for the vat. They don't pay it, and they can deduct it so they don't actually pay the vat, if they are vat registered.

Thank you for your reply fshore.

I was under the impression that only with EU Reverse charge countries I can send them a net (without VAT) invoice?

Otherwise Reverse Charge/Non Reverse Charge Countries would be treated same for non-physical B2B services (IT Consulting)

Receiving company is German Company which is VAT registered
Delivering company is Dubai UAE Company which is NOT VAT registered

 

[fshore]

Thank you for your reply fshore.

I was under the impression that only with EU Reverse charge countries I can send them a net (without VAT) invoice?

Otherwise Reverse Charge/Non Reverse Charge Countries would be treated same for non-physical B2B services (IT Consulting)

Receiving company is German Company which is VAT registered
Delivering company is Dubai UAE Company which is NOT VAT registered

I don't know german rules in particular, but for other european countries it works like this for B2B.
Reverse charge is for EU countries only. For domestic transactions the seller will add the VAT. For purchases from a non EU/German supplier then the German customer has to account for the VAT (which means they will enter it as both input and output VAT in the VAT return, so the balance actually pay i 0).