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BMF - IV B 4 - S 1301 USA - 22/04 BStBl 2004 I 411

DBA USA; Tax classification of the limited liability company established under the law of the states of the USA

For the question of whether the Limited Liability Company (LLC) US-American law is to be classified as a corporation or a partnership for purposes of German taxation, the following applies in agreement with the highest tax authorities of the countries:

I. Preliminary remark

In the USA, the legal form of the Limited Liability Company (literally: company with limited liability) is used to a considerable extent. The main reasons for their popularity are the flexibility under civil law in the drafting of the articles of association and the limited liability of the shareholders. It is also seen as an advantage that the LLC can regularly be treated as a partnership for tax purposes. This avoids the double economic burden of distributed profits that is inherent in the classic corporate tax system in the USA; in addition, losses of the company can be realized by the shareholders. The LLC is used by small and medium-sized companies, but also in the design of corporate structures. Activities in certain branches of business - e.g. banking and insurance - may not be carried out in the legal form of an LLC.

II. The LLC in corporate law of the USA

1. General

The legal structure of the LLC is determined by the company law of the US state in which the company was founded. All 50 states and the District of Columbia have LLC laws. These all follow the two published model laws (Uniform Limited Liability Company Act - ULLCA and ABA Prototype LLC ACT). They are therefore largely, but not completely, standardized. The LLC laws of the individual states are largely dispositive law, in accordance with the proposals of the model laws. Their regulations can therefore be waived regularly in the articles of association. There are thus a wide range of options for designing an LLC. As a result, it is neither possible to derive a legal mission statement for the LLC from the federal regulations, nor are there prevailing typical LLC contracts in practice.

2. Legal status and incorporation

The LLC always has its own legal personality, although it is not a corporation (corporation) is. It is not only created by contract, but also requires registration by the authorities of the founding state. To do this, it must submit a statute (articles of organization)which must contain information about the company, duration, company and business purpose, among other things. The establishment of an LLC usually has to be carried out by at least two shareholders. In contrast, the LLC is often permitted to operate after it has been founded by only one partner. The rights and obligations of the shareholders in the internal relationship (e.g. for management and representation, distribution of profits) are set out in the articles of association (operating agreement) regulated. The articles of association can be agreed in any form and are not publicly available.

3. Management and representation

The authority to conduct the business of the LLC rests in principle with all shareholders. Notwithstanding this, however, it can be agreed that the management powers belong to some shareholders or only one of them or to a management outside the company (Board of Managers) is transmitted. The power of representation in the external relationship is to be separated from the management authority in the relationship of the shareholders to one another. It is usually regulated in accordance with the management authority. If a management outside the company conducts the business, the managers have sole power of representation, unless this is reserved for the partners in the articles of association.

4. Deposits, Raising of Capital and Distribution of Profits

Contributions by the shareholders can be made in cash or in kind, but also in the form of services (in some cases also future services). A minimum capital is not required. The obligation to make contributions can, under certain circumstances, be waived by resolution of the shareholders.

The distribution of profits and losses is usually regulated in the articles of association. In the absence of special agreements, it is usually determined by the amount of the deposits. However, any other division is permissible under company law.

5. Liability

In principle, the shareholders are not liable to third parties; regularly there is also no obligation to make additional payments. Liability towards third parties is only possible on the basis of a special agreement (e.g. guarantee) and, under certain circumstances, in cases of abuse of the limitation of liability.

6. Dissolution and termination of the LLC

State laws routinely do not include a lifetime limit on the LLC. However, this can be contractually agreed. If no deviating agreements have been made in the articles of association, the LLC will be dissolved by agreement of all partners and, if one partner leaves, through death, resignation, exclusion or bankruptcy, unless the other partners decide to continue the company. The continuation can be stipulated from the outset in the articles of association.

7. Transferability of Shares

With regard to the rights arising from a company share, a distinction is made between property law (right to a share in the profits, to distributions and repayment of the contribution) and membership law (right to manage and control the company). A partner can transfer the property rights to third parties without restrictions. In contrast, the transfer of membership rights generally requires the consent of the other shareholders. Only with these rights does the third party acquire full legal status as a partner. However, the consent requirement can be waived in the articles of association.

III. The treatment of LLC in US tax law

Since 1997, the LLC's shareholders have been able to choose whether the company should be treated as a partnership or a corporation for US tax purposes. Once the choice has been made, the shareholders are bound for a period of five years. If no corporation is specifically chosen, the LLC will be considered a partnership for tax purposes. If the company has only one partner, it becomes the sole proprietorship of the owner and, if the owner is a non-resident, his dependent establishment (Branch) treated. The option relieves the shareholders of the compulsion existing under the earlier tax classification rules to enter into partnership agreements in order to achieve taxation as a partnership in such a way that they lead to tax classification as a partnership.

IV. Classification of the LLC for the purposes of German taxation

General principles

For German taxation purposes, an LLC can be classified as an independent tax subject (entity subject to corporation tax) or as a partnership and, if applicable, as a dependent branch (permanent establishment) of the sole shareholder of the LLC. The classification is particularly important for the taxation of profit shares, profit distributions and advance payments of a shareholder with unlimited tax liability in Germany and for the question of the contractual entitlement of an LLC that receives domestic income within the meaning of Section 49 EStG.

The classification of the LLC for the purposes of German taxation including the application of the German-American double taxation agreement (DTA) is based exclusively on domestic German tax law. The agreement does not stipulate that the law of the country of domicile decides on the classification of a legal structure. Rather, each contracting state classifies the application of the agreement in accordance with its own law. Therefore, the classification of the LLC according to the tax law of the USA and its states is irrelevant. It is therefore irrelevant in what sense the shareholders of an LLC have exercised their right to choose the tax treatment of the LLC in the USA.

For the classification of the LLC, the principles of a two-stage comparison of legal types developed by the case law of the RFH and the BFH are to be applied. These principles are based on whether a structure established under foreign law is a domestic corporation within the meaning of Section 1 Paragraph 1 No. 1 KStG or another legal person within the meaning of Section 1 Paragraph 1 No. 4 KStG (RStBl 1930 p . 444; BStBl 1968 II p. 695; vom, BStBl 1988 II p. 588; vom, BStBl 1992 II p. 972; vom, BStBl 1993 II p. 399). According to this, a foreign entity is to be classified as a corporation if an overall consideration of the relevant foreign provisions and the agreement made on the organization and structure of the entity shows that it is legally and economically the same as a domestic corporation or other legal person. For the comparison, all elements are to be used that make up the essential structural features of a corporation under German law. The more recent civil law jurisprudence (, DB 2003 p. 818) based on the friendship, trade and shipping agreement between the Federal Republic of Germany and the United States of America dated (Federal Law Gazette 1956 II p. 487) a US corporation according to the founding theory as such is to be recognized does not affect the requirement of classification according to the type comparison.

The following decisive criteria for the comparison can be derived from the case law on the comparison of legal types:

1. Centralized management and representation

The centralization of management and representation is a corporate characteristic. It exists when one person or several persons - but not all shareholders - are permanently authorized to make the decisions necessary for the implementation of the company's purpose without the consent of all - possibly the other - shareholders.

This is the case if the management and external representation of the company are carried out by external third parties or by an independent body (Board of Managers) to which non-shareholders as well as shareholders may belong (external organization, see e.g. §§ 76-78 AktG, §§ 6 , 35 GmbHG).

On the other hand, if the shareholders conduct the business of the company themselves and are solely authorized to represent them (self-management and representation, see e.g. Sections 114, 125 of the German Commercial Code), there is no centralization. It is absent in any case if the management and representation are carried out by all shareholders. If some of the shareholders are excluded from the management, this does not prevent the assumption of decentralized proprietary management if the company - similar to a German KG - is managed by the managing partners only in their capacity as shareholders and not by appointed or elected managing directors . A centralized management can also exist if the appointed and elected managing directors must come from the shareholders according to the statutes. This does not apply if only shareholders who are legally appointed to manage the company can be appointed or elected. If one or more shareholders appointed to manage (and represent) the company are involved in the legal form of a corporation and their management bodies (e.g. the board of directors) may also belong to outside the company, centralized management is to be assumed.

2. Limited Liability

The limitation of liability typical for a corporation is given if none of the partners is personally liable with their assets for the debts of the company or claims against it.

3. Free transferability of the shares

The unimpeded transferability of the shares in the company to non-shareholders (see e.g. § 15 GmbHG, § 68 AktG) is an essential characteristic of the corporation. In contrast, the transferability of shares in partnerships is generally excluded or only possible to a limited extent or only with the consent of the shareholders. The shares are freely transferable if, in accordance with the relevant statutory provisions or on the basis of the articles of association, the property and membership rights from the participation can be transferred to third parties without the consent of the other shareholders, so that the purchaser fully takes on the role of the seller . On the other hand, there is no free transferability if the consent of all or certain shareholders is required for the transfer of the shares.

4. Prize Allocation

In the case of a corporation, the allocation of a share of the profit to the shareholder depends on an annual resolution by the shareholders' meeting. In the case of partnerships, there is basically no need for a dividend resolution so that the partner can dispose of his share of the profits.

5. Raising capital

In the case of a corporation, the shareholders are obliged to raise the share capital by making a contribution. In contrast, the provision of equity capital is not required by law in a partnership. If contributions are waived in the articles of association or if these may then be provided in the form of services, this is a feature that speaks in favor of a partnership.

6. Unlimited life of society

A characteristic of the corporation is the basically unlimited - i.e. independent of the number of shareholders - the life of the company. Since the Commercial Law Reform Act of (BGBl 1998 I p. 1474) came into force, the death, termination or insolvency of a partner in a partnership no longer lead to the dissolution of the company, but to the departure of the relevant partner from the company ( see § 131 HGB). This criterion can therefore only be used to a limited extent for classification, namely if the life span is limited under foreign law or under the articles of association or the company is not a commercial partnership. The unlimited life of the company can be assumed if the foreign company law determines the dissolution of the company for the stated or comparable reasons, but the shareholders can agree to continue the company despite the existence of a reason for dissolution and this continuation in the articles of association from the outset without further conditions is fixed. The assumption of a limited lifespan presupposes that the company is dissolved without further action by the shareholders if certain events occur. It is therefore to be accepted if, if there is a reason for dissolution, the continuation of the company with the other shareholders depends on a separate shareholder resolution. For the assumption of a limited lifespan, it is sufficient if the foreign law or the articles of association only names one event as a reason for termination. However, if the occurrence of such an event cannot realistically be expected, it is not to be recognized as a reason for termination.

7. Distribution of profits

In the case of a corporation, the share in the profits of the shareholder is generally measured according to the ratio of the nominal amounts of the shares (see for the AG Section 60 (1) AktG) or the shares (see for the GmbH Section 29 (3) GmbHG). In the case of partnerships, the distribution is generally based on the amount of the deposits and, otherwise, on a per capita basis (Sections 121, 168 HGB). The distributability of a part of the profit regardless of the contribution takes into account the personal commitment of the partner in a partnership, while the position of the investor is in the foreground for the partner of a corporation.

8. Formal formation requirements

The creation of the AG, KGaA and GmbH requires their entry in the commercial register. The entry is only made after an examination of the correctness of the establishment and registration. In order to establish a corporation, the articles of association must be confirmed by a “public authority” in order to be enforceable (cf. BStBl 1992 II p. 972). The conclusion of a partnership agreement alone is therefore not enough. Partnership companies, on the other hand, already arise through the articles of association. The entry in the commercial register is only relevant for the effectiveness vis-à-vis third parties.

9. Other criteria

In addition to the features mentioned, the existing or missing legal capacity of the foreign entity abroad is not of decisive importance for the classification (RStBl 1930 p. 444; BStBl 1988 II p. 588). Likewise, the number of partners is not suitable as a characteristic for the distinction between corporation and partnership (BStBl 1984 II p. 751).

V. Classification of the LLC in individual cases

With regard to the wide range of options for structuring an LLC under the law of the US states, no general statement can be made about its classification for German taxation purposes. The assessment must therefore be based on the specific design in accordance with the statutory provisions and the agreements in the articles of association in the individual case.

Since it is crucial for the classification whether the characteristics of an LLC in their overall picture are more typical for a corporation or for a partnership, the individual characteristics must be weighted in the assessment. In this context, none of the characteristics alone can be of decisive importance. Therefore, for example, the limited liability or indefinite life of the LLC as corporate characteristics cannot, in and of themselves, result in the LLC being classified as a corporation. If the examination does not lead to a clear overall picture in individual cases, the company is to be classified as a corporation if it has the majority of the criteria mentioned under IV. 1. to 5. that speak for a corporation. The criterion mentioned under IV. 6. (unlimited service life) is only to be included under the conditions mentioned there.

VI. Notes on the legal consequences of classifying an LLC

All tax consequences must be drawn from the classification of the LLC. The following must be observed in particular:

1. German tax law

  1. If the LLC is classified as a corporation, the income is attributable to the company. Your domestic shareholders are only subject to German taxation with the profit distributions in the form of dividends within the meaning of Section 20 (1) No. 1 EStG. If necessary, § 3 No. 40 EStG and § 8b KStG are to be applied. The profit distributions are subject to withholding tax in the USA if the LLC is treated as a corporation there.

  2. If the LLC is classified as a partnership, the profit determined for the LLC is to be allocated to the shareholders and recorded in their personal income tax assessment as income from commercial operations (Section 15 EStG) or from self-employed work (Section 18 EStG). The "profit distributions" are then only withdrawals that are irrelevant for tax purposes.

2. Convention Law

  1. If shareholders resident in Germany receive income from the LLC, the German taxation authority is based on Article 23 (2) DBA. If the LLC is to be classified as a corporation from the point of view of both German and US tax law, the shareholders receive dividends within the meaning of Articles 10 and 23 (2) DBA. They are to be excluded from the assessment basis under the conditions of Article 23 Paragraph 2 Letter a DTA; Section 8b (1) and (5) KStG remains unaffected. If the requirements of Article 23 (2) (a) DTA are not met and Section 8b (1) KStG is also not applicable, a withholding tax levied by the USA in accordance with Article 23 (2) is levied on the German tax on dividends Letters b, aa DBA to be counted. If, on the other hand, the LLC is to be treated as a partnership (co-entrepreneurship) with a permanent establishment in the USA, the profits attributable to the shareholders resident in Germany that are attributable to the permanent establishment are, according to Article 23, Paragraph 2, Letter a DTA, from the assessment basis , possibly subject to progression.

  2. If an LLC receives domestic income, it must be checked whether and to what extent it can claim treaty advantages in Germany. The agreement eligibility requires the LLC to be a US resident. This is not the case, regardless of the valuation under German tax law, if the USA classifies you as a partnership. In this case, the focus is rather on the residence and the agreement entitlement of the shareholders (Article 4, Paragraph 1, Letter b DTA). It also depends on the agreement entitlement of the shareholders if the USA treats the LLC as a corporation, but it is classified as a partnership under German tax law.

3. Different classification of the LLC in Germany and in the USA

The classification of an LLC for German and American taxation purposes can be different, in particular because of the voting rights that exist in the USA. The different classification can also result in a different legal qualification of income. It should be noted that each contracting state classifies income in accordance with Article 3, Paragraph 2 of the DTA according to its own law, unless the agreement provides otherwise.

  1. If the LLC is treated as a corporation in the USA, but is to be regarded as a co-entrepreneurship under German tax law, the shareholders resident in Germany achieve commercial profits (company income) within the meaning of Article 7 DBA; they are to be exempted from the assessment basis in accordance with Article 23 (2) (a) of the DTA if they are attributable to a US permanent establishment of the LLC. In contrast, the USA tax the profits of the LLC and levy withholding tax in the event of a distribution (Article 10 (2) DTA). Withholding tax is not offset, as the distributions are not taxed as withdrawals that are not relevant for tax purposes.

  2. If the USA treats the LLC as a partnership, but it is considered a corporation under German tax law, this leads to the taxation of the shareholders in the USA with their share of the LLC's profit. According to German tax law, the shareholders are also taxed, but only with the dividends of the LLC (see above No. 1 letter a). According to the treaty, the distributions are income within the meaning of Article 21 (1) DBA, as the LLC is not a company based in the USA (Article 4 (1), 10 (1) DBA). There is no US withholding tax, since according to the American valuation the distribution of the profit is not a taxable event.

BMF v. - IV B 4 - S 1301 USA - 22/04


Reference (s):
BStBl 2004 I page 411
KAAAB-19504