The German tax authorities released guidelines on March 29 2004 clearing up long-standing confusion over the classification of limited liability companies (LLCs) for tax purposes as either a partnership or a corporation. This covers situations where a US LLC invests in Germany as well as investments in US LLCs by German investors.
The guidelines set out factors that the tax authorities now use to assess whether a business entity is a corporation or a partnership. These factors are similar to the former US resemblance test. They are:
— centralized management;
— limited liability;
— free transferability of interest;
— distributions;
— capital contributions;
— continuity of life (only under certain circumstances);
— allocation of profits and losses; and
— registration.
Tax advisers have generally approved of the new guidelines. "It is now possible to achieve the desired tax treatment of an LLC in Germany by setting up an LLC along the criteria set by the tax authorities," said Roderic Pagel, a tax lawyer with Clifford Chance in Frankfurt. "This means that the LLC is now, from a German tax perspective, a tool with great flexibility."
LLC investments have become increasingly popular in Germany since the late 1990s.
ITR Week welcomes your feedback on this or any other story. Please email the author with your comments. Letters may be published online.
