If you are a US citizen who owns a German GmbH or UG, your company can create significant US reporting requirements.
Depending on your ownership, you may need Form 5471, and if the company is a controlled foreign corporation (CFC), some company income may affect your US tax return even when the profits remain in Germany.
Owning a German company is very different from simply earning a salary or working as a freelancer.
A GmbH or UG may operate entirely in Germany, pay German corporate tax and maintain German bank accounts, but a US citizen who owns the company still needs to consider US international tax rules.
For your US return, the most important questions are how much of the company you own, whether Form 5471 is required, whether the company is a controlled foreign corporation, and whether company income creates a current US tax consequence for you personally.
Foreign company reporting can be one of the more complex areas of US expat taxes in Germany, particularly when Form 5471 and CFC rules apply.
Key Takeaways: German GmbH & UG
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Owning a German GmbH or UG can create Form 5471 reporting requirements in the US.
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A 10% ownership interest can be important under the Form 5471 and CFC rules.
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If US shareholders own more than 50% of the company, it may qualify as a CFC.
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CFC rules can result in US taxable income even when profits remain inside the German company.
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Salary, distributions, German corporate taxes and company bank accounts can all affect your US reporting.
Quick Facts: German GmbH and UG Reporting for Americans
| If you… | What it can mean for your US return |
| Own 10% or more of a GmbH or UG | Form 5471 reporting may apply |
| Own more than 50% yourself | The company will generally meet the CFC ownership test |
| Own the company with other US persons | Combined US shareholder ownership can create CFC status |
| Leave profits inside the company | CFC rules may still create current US taxable income |
| Receive salary | Report the compensation on your US tax return |
| Receive distributions | Determine whether they are dividends or previously taxed earnings |
| Company pays German corporate tax | Taxes may affect CFC and foreign tax credit calculations |
| Control company bank accounts | FBAR reporting may need to be considered |
| Make a Section 962 election | Additional US tax calculations and distribution rules apply |
How is a German GmbH or UG Treated for US Tax Purposes?
The first step is determining the company’s classification under US tax rules.
A company’s German legal classification does not by itself determine its treatment for US federal income tax purposes.
A German GmbH is generally treated as a foreign corporation for US federal tax purposes. A UG also needs to be considered under the applicable US entity-classification rules.
Once the business is treated as a foreign corporation, your ownership percentage and relationship to the company determine which additional US reporting requirements apply.
This is where Form 5471 becomes particularly important.
When Do You Need to File Form 5471?
Form 5471 is an information return filed by certain US persons who are officers, directors or shareholders of foreign corporations.
There are several categories of Form 5471 filers, and the filing requirement depends on factors such as your ownership percentage, changes in ownership and whether the foreign company is a CFC.
For example, a filing requirement can arise when a US person acquires a 10% ownership interest in a foreign corporation or when a US shareholder owns stock in a CFC.
Form 5471 is generally attached to your US income tax return.
It does much more than simply tell the IRS that you own a German company. Depending on your filing category, detailed information about the company’s income, assets, taxes, ownership and transactions may need to be reported.
Why Does 10% Ownership Matter?
A 10% ownership interest is an important threshold under several US international tax rules.
For CFC purposes, a US shareholder generally includes a US person who owns at least 10% of a foreign corporation’s voting power or value, applying the relevant ownership rules.
Form 5471 also has filing categories involving certain acquisitions, dispositions and ownership levels.
However, the shares registered directly in your name are not always the only shares that count.
US tax law includes direct, indirect and constructive ownership rules. Ownership through another company, partnership or certain family relationships can therefore affect how much of a German company you are considered to own.
When Does a German GmbH or UG Become a CFC?
A controlled foreign corporation is generally a foreign corporation in which US shareholders own more than 50% of the company’s total voting power or total value, applying the relevant ownership rules.
For example, if you are a US citizen and own 100% of a German GmbH, the company will generally be a CFC.
But you do not have to own the entire business yourself.
Several US shareholders can collectively cause a German company to meet the CFC ownership test.
CFC status matters because it can create additional US tax calculations beyond simply filing Form 5471.
How CFC Income Can Be Taxed Before You Receive a Distribution
One of the most important concepts for American owners of German companies is that leaving profits inside the company does not necessarily defer all US taxation.
Suppose your GmbH earns a profit but keeps the money in its German bank account to fund future business operations.
You may not have personally received that money. However, US CFC rules can require certain company income to be included in a US shareholder’s taxable income before cash is actually distributed.
Depending on the company’s activities and the rules applicable to the tax year, this can involve Subpart F income and the CFC tested-income regime.
This is why your US tax preparer may need your company’s financial statements every year even when the GmbH has not paid you a dividend.
Own a GmbH or UG?
Find out if you need Form 5471 and how CFC rules affect your US return. Missed filings carry a $10,000 minimum penalty per form, and owning a German company is often enough to trigger one.
How Are Salary and Distributions Reported on Your US Return?
Money you receive personally from your GmbH or UG also needs to be classified correctly.
Salary
Salary paid to you by the German company generally needs to be reported as compensation on your US tax return.
Depending on your circumstances, the Foreign Earned Income Exclusion or Foreign Tax Credit may help reduce US income tax. Social security coverage under the US-Germany agreement may also need to be considered.
Dividends and Other Distributions
Distributions from the company require additional analysis.
A distribution may be treated as dividend income in some circumstances. However, if the company is a CFC, distributions can also include income that has already been taxed to you under the CFC rules.
This is generally referred to as previously taxed earnings and profits, or PTEP.
As a result, you should not automatically report every payment from your GmbH as an ordinary foreign dividend. Your preparer needs to consider the company’s prior US tax treatment.
How Do German Corporate Taxes Affect Your US Taxes?
Your GmbH or UG may already pay German corporate income taxes on its profits.
Those taxes can be relevant when determining the US tax consequences of CFC income, but German corporate tax paid by the company is not automatically treated as foreign income tax paid personally by you.
Whether those taxes can be taken into account on your US return depends on the applicable international tax rules.
This becomes particularly important when considering a Section 962 election.
What is a Section 962 Election?
Section 962 allows certain individual US shareholders of CFCs to elect corporate-style treatment for specified CFC income inclusions.
Depending on the circumstances, the election can change the US tax calculation and may allow certain foreign corporate taxes to be taken into account.
This can be particularly relevant when a German company already pays significant corporate tax.
However, a Section 962 election is not automatically beneficial. Your accountant should compare the US tax result with and without the election and also consider how future distributions from the company will be taxed.
The long-term effect matters just as much as the immediate tax result.
Does Your German Company Bank Account Need to Be Reported?
Foreign bank account reporting is separate from Form 5471.
An FBAR may be required when a US person has a financial interest in, signature authority over or certain other authority over foreign financial accounts and the aggregate value of reportable foreign accounts exceeds $10,000 during the year.
If you can control your GmbH or UG’s German bank account, make sure your US tax preparer knows about it even though the money belongs to the company.
Your relationship to the account can then be reviewed to determine whether it needs to be included on your FBAR.
Form 8938 may also need to be considered separately depending on your foreign financial assets and applicable reporting threshold.
Want your German Company Reported Correctly in the US?
Universal Tax Professionals specializes in preparing Form 5471 for Americans who own German GmbHs or UGs. We ensure that your company reporting is properly coordinated with your personal return.
What Information Is Needed to Report a German GmbH or UG?
Form 5471 can require detailed company-level information, so your personal German tax return alone is generally not enough.
For your US filing, be prepared to provide:
- Ownership information: your percentage ownership, other shareholders and any changes in ownership during the year.
- Company financials: the annual profit and loss statement, balance sheet and German corporate tax return.
- Taxes paid: details of German corporate income taxes and other relevant foreign taxes.
- Payments and shareholder transactions: salary, dividends, other distributions, capital contributions and shareholder loans.
- Foreign accounts: details of company bank accounts over which you have financial interest or signature authority.
If the company is a CFC, your preparer may need additional information to calculate Subpart F income, tested income, foreign taxes and previously taxed earnings and profits.
Keeping complete financial records each year is particularly important because Form 5471 calculations can rely on information carried forward from previous US tax returns.
Why US Tax Planning Matters Before Forming a GmbH or UG
If you are considering establishing a German company, it is useful to review the US consequences before incorporating.
Your German adviser will naturally focus on German legal requirements, corporate taxes and the structure that makes sense for operating the business in Germany.
As a US citizen, you also need to understand how the ownership structure will affect Form 5471 reporting, whether the company will become a CFC and how its profits will be treated on your individual US return.
Planning before the company is formed gives you an opportunity to consider both tax systems rather than discovering the US reporting consequences after the structure is already in place.
Getting Help With US Reporting for a German GmbH or UG
Universal Tax Professionals assists Americans who own foreign corporations with Form 5471, CFC calculations and related international reporting.
If you already own a German GmbH or UG, we can review the ownership structure and company financial information to determine what needs to be reported with your US tax return and how the company’s income, taxes and distributions affect your individual filing.
