Comparison of legal forms

With cross-border M&A activities the question arises how foreign companies should be classified from the German tax point of view. This question is of relevance for example in the case of income attribution. If a foreign company is classified as a corporation, its income is attributed to that corporation. Taxation in Germany takes place not earlier than at the time of profit distribution in the form of dividends according to Sec. 20 (1) of the German Income Tax Act (Einkommensteuergesetz, EStG). If a foreign company is classified as a partnership, however, the profit is attributed directly to the partners, for example, as income from business (Sec. 15 EStG). As a rule, the partners in a foreign partnership are deemed to have created a permanent establishment abroad (the partnership) which is attributable  to each partner on a “pro rata” basis. In states which have concluded a double taxation treaty (DTT) with Germany, the right to tax the profits generated by the permanent establishment is assigned under Sec. 7 DTT to the state in which the permanent establishment is situated. Furthermore, the classification of the company is of significance when a foreign company is sold or transformed. In the event of a sale, the tax exemption under Sec. 8b KStG is applicable only to – from the German point of view – foreign corporations.

The classification of a foreign company as a partnership or corporation takes place exclusively based on German tax law. In doing so, it is examined whether the structure of the foreign company is similar to a German corporation or to a German partnership. The classification under foreign tax law or any choices of legal treatment exercised abroad – analogous to Sec. 1a KStG – are irrelevant.  Thus, there are actually cases where the classification of a company under foreign law deviates from its classification under German law, i.e. the same company is treated as a corporation abroad but as a partnership in Germany, and vice versa.

Many foreign legal forms have already been classified as partnerships or corporations by the legislator or the tax authorities. The respective overviews are presented in tables 1 and 2 of the annex to the permanent establishment decree (BMF 24 December 1999, IV B 4 – S 1300 – 111/99, BStBl. I 1999, p. 1076), in Annexes I, Part A of the Merger Directive (2009/133/EC of 19 October 2009) and the Parent-Subsidiary Directive (2011/96/EU of 29 November 2011).

In cases not yet decided or where a company form – depending on the concrete structuring – can be classified as a partnership or a corporation, the letter of the German Federal Ministry of Finance (BMF) containing administrative guidance on the tax treatment of US limited liability companies (BMF of 19 March 2004 - IV B 4 - S 1301 USA - 22/04 BStBl 2004 I 411) provides classification criteria. These criteria have to be taken into consideration not only when classifying a US LLC but also for any other legal forms which are not obvious.

Main criteria which indicate that a foreign entity is a corporation are:

Subsidiary criteria which indicate that a foreign entity is a corporation are: