The GmbH for U.S. Taxes, Reporting and Filing Disclosure

The GmbH for U.S. Taxes, Reporting and Filing Disclosure

A GmbH for U.S. Taxes, Reporting, and Filing Disclosure

When a Person in the United States wants to create a small company, oftentimes they will create a limited liability company or an LLC. Likewise, in foreign countries LLC equivalents are also very common — and especially in Germany where the GmbH or ‘Gesellschaft mit beschränkter Haftung ‘is one of the common types of entity formations (a GmbH is used in other countries as well but is primarily associated with Germany). With the globalization of the U.S. economy, it is very common for taxpayers who were originally from Germany to either live in the United States or have U.S. tax status to have a foreign LLC. And, it is also common for taxpayers who are now U.S. persons but either lived or worked in Germany to have an interest in a GmbH. There are various tax and reporting requirements for individuals who have an investment in a German GmbH. Let’s look at some important facts involving US taxpayers who have an interest in or ownership of a GmbH.

What is a GmbH?

A GmbH is a type of limited liability company, in which the owners create the company by meeting the capital requirements, appointing director(s), and conducting business operations. Depending on the size of the company will determine whether the GmbH must meet additional restrictions, such as a Supervisory Board.

GmbH is Not a ‘Per Se’ Corporation

Unlike other types of companies, the German GmbH is not considered a per se corporation under U.S. tax law. That means if the GmbH is considered to be a corporation and not a partnership then it will not be treated as a per se corporation, which means there is the potential to disregard the entity if all the necessary facts apply.

Is GmbH a Corporation or Partnership (Rev. Rul. 77-214 and 93-4)

When it comes to foreign entities, one of the biggest questions becomes whether that entity should be treated as a corporation, partnership, or even a trust. The GmbH may be classified as either a Corporation or Partnership.

As provided in Rev.Rul. 77-214:

      • “German law on limited companies contains a great number of optional provisions that can be modified by the memorandum of association so that, in effect, depending on the construction of the memorandum of association, a GmbH can assume the characteristics of a corporation or of a partnership.

      • Accordingly, a GmbH will not be automatically classified as either a partnership or an association taxable as a corporation for Federal income tax purposes. The classification of a GmbH as a partnership or an association taxable as a corporation depends on all the relevant facts and circumstances of each case, including the memorandum of association filed with the judge of the Commercial Register having jurisdiction of such register.”

As provided in Rev.Rul. 93-4:

      • Rev. Rul. 77-214, 1977-1 C.B. 408, is modified and superseded effective /*/. Organizations existing prior to /*/, that reasonably relied upon Rev. Rul. 77-214 can maintain their current classification by reporting consistently with that classification on the first relevant federal income tax return of the organization or member filed after /*/.

GmbH German Taxes Paid

The GmbH Is generally taxed at 15% in Germany although there are additional taxes required to be paid which may further increase the overall tax liability period. In general, foreign tax credits are only applicable to income taxes and not other taxes although there is a totalization agreement between Germany and the United States which may impact the outcome of Social Security-related taxes.

Form 5471 or 8865

Depending on whether the GmbH is considered a corporation or partnership would determine whether or not it has to file Form 8865 and Form 5471. This may also impact other issues such as whether or not is considered a controlled foreign corporation and whether ancillary issues such as Subpart F income and GILTI may apply.

Should You Disregard the Entity?

If the GmbH is considered to be a foreign corporation, then taxpayers may have the opportunity to disregard the entity. There are pros and cons to disregarding the entity, with the major pro being that a Form 5471 may not be required along with other complicated tax issues such as Subpart F and GILTI. On the other hand, once the entity is disregarded, then the taxpayer must include all of the income attributed to them on their U.S. tax return, usually following a Schedule C. This may also require the payment of social security taxes – although this may be avoided under the U.S./Germany Totalization Agreement.

Late Filing Penalties May be Reduced or Avoided

For Taxpayers who did not timely file their FBAR and other international information-related reporting forms, the IRS has developed many different offshore amnesty programs to assist taxpayers with safely getting into compliance. These programs may reduce or even eliminate international reporting penalties.

Current Year vs Prior Year Non-Compliance

Once a taxpayer missed the tax and reporting (such as FBAR and FATCA) requirements for prior years, they will want to be careful before submitting their information to the IRS in the current year. That is because they may risk making a quiet disclosure if they just begin filing forward in the current year and/or mass filing previous year forms without doing so under one of the approved IRS offshore submission procedures. Before filing prior untimely foreign reporting forms, taxpayers should consider speaking with a Board-Certified Tax Law Specialist who specializes exclusively in these types of offshore disclosure matters.

Avoid False Offshore Disclosure Submissions (Willful vs Non-Willful)

In recent years, the IRS has increased the level of scrutiny for certain streamlined procedure submissions. When a person is non-willful, they have an excellent chance of making a successful submission to Streamlined Procedures. If they are willful, they would submit to the IRS Voluntary Disclosure Program instead. But, if a willful Taxpayer submits an intentionally false narrative under the Streamlined Procedures (and gets caught), they may become subject to significant fines and penalties

Need Help Finding an Experienced Offshore Tax Attorney?

When it comes to hiring an experienced international tax attorney to represent you for unreported foreign and offshore account reporting, it can become overwhelming for taxpayers trying to trek through all the false information and nonsense they will find in their online research. There are only a handful of attorneys worldwide who are Board-Certified Tax Specialists and who specialize exclusively in offshore disclosure and international tax amnesty reporting. 

Golding & Golding: About Our International Tax Law Firm

Golding & Golding specializes exclusively in international tax, specifically IRS offshore disclosure

Contact our firm today for assistance.