Post by Endres on Jan 6, 2009 22:44:19 GMT 4
German court ignores US partnership election of Florida LLC
The Supreme Tax Court has rejected a taxpayer's claim that his profit share from an investment in a Florida limited liability company (LLC) should be automatically exempted from German taxation under the US/German treaty as income earned through a US permanent establishment. The claim was based on the US check the box election made by the LLC to be treated as a partnership, that is, for each investor to be taxed on his own profit share. The German tax office on the other hand saw the LLC as a corporation and sought to treat the profit share of the German investor as a dividend; that is as fully taxable in Germany with a credit for the US tax actually borne.
The Supreme Tax Court has now held the US election to be irrelevant in Germany. Rather, it has fallen back on its traditional view that a foreign entity – the LLC – should be seen as a corporation or partnership depending on its closest German equivalent. The comparison is individual, based on the LLC's Articles of Organisation in conjunction with its governing statute, here the Florida Limited Liability Company Act. The eight criteria are:
* Centralised management
* Limited liability
* Free transferability of the shares
* Profit distribution by shareholders' resolution
* Defined capital contributions
* Unlimited term of the company
* Dividends per share as opposed to profit sharing ratios
* Formation and registration formalities
In its decision the court overruled the lower court by stating that if the LLC were to be seen as a corporation from a German angle, article 21 of the treaty would allocate the taxation right to Germany.
This case was decided on the basis of the original 1989 treaty which was generally seen as allowing each state its own definition of a corporation. This has now been spelled out in more detail in the amending protocol of June 1 2006 with its replacement of the old single-sentence Art.1 on personal scope with a seven-paragraph article on general scope. However, there is still nothing to require the one state to follow the definitions of a taxable person of the other where its own law dictates otherwise.
Dieter Endres (dieter.endres@de.pwc.com), Price Waterhouse, Germany
The Supreme Tax Court has rejected a taxpayer's claim that his profit share from an investment in a Florida limited liability company (LLC) should be automatically exempted from German taxation under the US/German treaty as income earned through a US permanent establishment. The claim was based on the US check the box election made by the LLC to be treated as a partnership, that is, for each investor to be taxed on his own profit share. The German tax office on the other hand saw the LLC as a corporation and sought to treat the profit share of the German investor as a dividend; that is as fully taxable in Germany with a credit for the US tax actually borne.
The Supreme Tax Court has now held the US election to be irrelevant in Germany. Rather, it has fallen back on its traditional view that a foreign entity – the LLC – should be seen as a corporation or partnership depending on its closest German equivalent. The comparison is individual, based on the LLC's Articles of Organisation in conjunction with its governing statute, here the Florida Limited Liability Company Act. The eight criteria are:
* Centralised management
* Limited liability
* Free transferability of the shares
* Profit distribution by shareholders' resolution
* Defined capital contributions
* Unlimited term of the company
* Dividends per share as opposed to profit sharing ratios
* Formation and registration formalities
In its decision the court overruled the lower court by stating that if the LLC were to be seen as a corporation from a German angle, article 21 of the treaty would allocate the taxation right to Germany.
This case was decided on the basis of the original 1989 treaty which was generally seen as allowing each state its own definition of a corporation. This has now been spelled out in more detail in the amending protocol of June 1 2006 with its replacement of the old single-sentence Art.1 on personal scope with a seven-paragraph article on general scope. However, there is still nothing to require the one state to follow the definitions of a taxable person of the other where its own law dictates otherwise.
Dieter Endres (dieter.endres@de.pwc.com), Price Waterhouse, Germany