Does a US LLC reduce your tax? The honest answer.

“Tax-free with a US LLC” is one of the most persistent promises on the internet. As a rule, it does not hold true for business owners who live in Germany, Austria or Switzerland and work from there. Here is why — and what a US company is still good for.

In brief

As a rule, no. A US LLC that a business owner manages from Germany, Austria or Switzerland has its place of management there — in Swiss terms, its place of effective management — and is taxable there. On top of that, there are reporting duties in both countries. A US company is worthwhile for genuine business in the US and for building capital — not for avoiding tax. The capital is not tied to the US: your company can transfer funds to Europe or invest them in Europe — within the terms of the institution concerned. Our partner tax adviser clarifies with you in advance how transfers and investments are treated for tax purposes.

Where the promise comes from

In the US, an LLC with a single foreign shareholder (member) is usually not treated as a separate taxable entity for tax purposes. If it has no business there, it often pays no federal tax on its profit in the US. States such as Wyoming also levy no corporate income tax of their own. Online, this quickly turns into “tax-free”. What gets overlooked is that the country in which the business owner lives and works has its own rules — and they are tied not to the company’s registered office but to where it is actually managed.

Germany: the place of management

Under section 10 of the German Fiscal Code (AO), the place of management is the centre of the company’s top-level commercial direction. Anyone who takes the important decisions for their US company at a desk in Germany has its place of management in Germany. A corporation within the meaning of German tax law (Kapitalgesellschaft) whose place of management is in Germany is subject to unlimited corporate income tax there (section 1 of the German Corporate Income Tax Act, KStG) — on all of its income. Whether the tax office treats the LLC like a GmbH or like a partnership depends on a classification by comparison with German legal forms (Typenvergleich), based on the overall picture of its features (letter from the German Federal Ministry of Finance of 19 March 2004). How it is classified in the US plays no role in this. For low-taxed, passive income, the controlled foreign company rules (Hinzurechnungsbesteuerung) under the German Foreign Tax Act (AStG) may also apply. Then there is the notification: the formation of the company or the acquisition of the shareholding must be reported to the tax office under section 138 of the German Fiscal Code (AO), together with the tax return.

Switzerland and Austria

In Switzerland, legal entities are taxable if their registered office or their place of effective management is located there (Art. 50 of the Swiss Federal Direct Tax Act, DBG). Here too: anyone who manages the US company from Switzerland must expect to be taxable in Switzerland. Austria likewise looks to the place of management. In all three countries, the same question is therefore decisive: where is the company actually managed?

What applies where

Simplified overview; in the individual case, the activity, the legal form and the double taxation agreement decide.

Connecting factor · US: Business in the US, legal form · Germany: Place of management (§ 10 AO) · Switzerland: Registered office or place of effective management (Art. 50 DBG)
Reporting · US: Form 5472 with Form 1120, annually · Germany: § 138 AO with the tax return · Switzerland: under cantonal and federal law
Classification of the LLC · US: usually not a separate taxable entity · Germany: Typenvergleich (comparison with German legal forms) · Switzerland: under Swiss law
Who reviews it · US: US CPA · Germany: Tax adviser · Switzerland: Fiduciary or tax adviser

What a US company is good for

Good for — Business in the US: Contracts with US customers, a US account, payments in US dollars, separate liability, a card history of its own in the US.
Good for — Building capital — for Europe too: The capital is not tied to the US: your company can transfer funds to Europe or invest them in Europe — within the terms of the institution concerned. Our partner tax adviser clarifies with you in advance how transfers and investments are treated for tax purposes.
Not good for — Avoiding tax at home: If it is managed from home, it is generally taxable there. Anyone promising “tax-free” is keeping quiet about the place of management.

What you need to know

This article explains the basics. Before formation, our partner tax adviser reviews your case under your engagement — the review is included in the fixed price of every package.
A US company that is managed from Germany, Austria or Switzerland remains taxable there; its formation must be reported to the tax office (in Germany under section 138 of the German Fiscal Code, AO).
Annual filing duties apply in the United States even without revenue (Form 5472 with Form 1120), along with state fees and the cost of the registered agent.

Frequently asked questions

Do I have to pay tax on my US LLC in Germany?

If you manage it from Germany, as a rule yes: its place of management is then in Germany (§ 10 AO). How the tax office classifies the LLC depends on a comparison with German legal forms (Typenvergleich).

Is a Wyoming LLC “tax-free”?

Wyoming levies no corporate income tax of its own. However, the company is taxable where it is managed — for business owners from Germany, Austria or Switzerland, that is generally at home.

Why do so many providers advertise a “tax-free” LLC?

Because an LLC with a foreign shareholder often pays no federal tax in the US. That is true for the US, but it says nothing about tax liability in the home country — and that depends on the place of management.

So what is a US company actually good for?

For genuine business in the US — contracts with US customers, a US account, payments in US dollars, separate liability, a card history of its own — and for building capital. The capital is not tied to the US: your company can transfer funds to Europe or invest them in Europe — within the terms of the institution concerned. Our partner tax adviser clarifies with you in advance how transfers and investments are treated for tax purposes.

Read on

From Germany to the US. With everything the tax office needs to know. – A US LLC or corporation from Germany: tax at the place of management, the section 138 AO notification, how the LLC is classified — explained honestly.
From Switzerland to the US. With a partner in Zurich. – A US company from Switzerland: place of effective management, tax liability, a partner in Zurich — formation, EIN and account in one place, fixed price.
Form 5472. The filing no one can afford to forget. – Form 5472 with a pro forma Form 1120: who must file, what to report, the 15 April deadline, the $25,000 penalty — required even without revenue.
Your LLC’s US tax return. Which forms, which deadlines. – Pro forma 1120, 1040-NR, 1065, 1120-F, FBAR: which US returns your LLC must file, by structure — with deadlines and the double taxation agreement.