What is a Domestic LLC
Treatment of participation in a US LLC under treaty law
04/06/2009 | Federal Fiscal Court
from StB RA Dipl.-Jur. Tim Lühn, Düsseldorf
|The BFH had to judge the double taxation taxation of income of a domestic partner from a US limited liability company (LLC). According to the treaty, the USA only has the right to tax this income if the LLC is also a partnership from a German point of view, which provides the shareholder with a permanent establishment in the USA. If, on the other hand, the US LLC qualifies as a corporation from the German point of view, the German tax authorities have the right to tax the resulting dividends. According to established case law, a domestic comparison of types (BFH 08/20/08, I R 34/08, retrieval no. 083294) decides whether the LLC qualifies as a partnership or corporation.|
The plaintiff is resident in Germany and earned income for the years 1997 to 1999 from his participation in a US LLC founded in Florida. As a result of exercising a tax option, the LLC was considered a partnership in the USA. The tax office saw the LLC as a corporation and the profit shares as income from capital assets, which were taxable in Germany according to Art. 10 Para. 1 DBA-USA. The action against it was successful (FG Baden-Württemberg 17.3.08, 4 K 59/06). The FG only considered the LLC income within the framework of the progression proviso and otherwise did not include the income in the assessment basis. The BFH overturned this decision and referred the dispute back to the FG. The FG Baden-Württemberg was instructed to initially qualify the LLC as a partnership or corporation based on the domestic comparison of types, since the agreement-based allocation of the taxation rights for LLC income depends on this.
According to US tax law, the LLC is a legal entity, but it can choose to be considered a partnership for tax purposes. Insofar as the LLC is also a partnership from the German point of view that is relevant for the purposes of German taxation, the LLC participation of the domestic plaintiff is considered to be a permanent establishment located in the USA according to the established case law of the BFH. According to Art. 7 para. 1, 23 para. 2 DBA-USA, the taxation right under the treaty law for this permanent establishment income is assigned to the USA and is therefore tax-exempt in Germany, but is subject to the progression proviso.
If, on the other hand, the LLC qualifies as a corporation from the German point of view, the permanent establishment regulation according to Art. 7 Paragraph 1, 23 Paragraph 2 DBA-USA is not applicable due to the lack of a permanent establishment. A tax exemption of LLC income as dividends in Germany is excluded according to Art. 10 Paragraph 1, 23 Paragraph 2 DBA-USA, since the corporation is not considered to be resident in the USA in the event of a dispute. According to Art. 4 Para. 1 DBA-USA, a legal person is only deemed to be "a resident of a contracting state" if, according to the law, it is based there on the basis of its domicile, permanent residence, place of management, place of establishment or of another similar characteristic is taxable. This is not the case here, however, since the LLC in the USA is not viewed as an independent taxable entity due to the option to become a partnership and not itself, but its shareholders, are subject to US income taxation. Also a residence according to Art. 4 Para. 1 2nd HS. lit.) b DBA-USA 1989 old version is ruled out. In order to do this, a partnership must meet the requirement that the income received from it is taxed in this state like income from residents there. This requirement does not apply in the event of a dispute because the income of the resident partner is (only) subject to limited taxation in the USA and is not taxed like income of residents there.
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