– Which key traps await owners through strategic structuring errors?
The combined GbR-and-LLC construct is also available individually, along with its supposed advantages
Since the amendment of the so-called Burden-Sharing Act (Lastenausgleichsgesetz, the German burden-sharing levy) in 2019, social-media posts have multiplied promising effective protection against “expropriation”, particularly
of real estate. Not every off-the-shelf solution ultimately holds up.
For asset protection, reference is often made to the Treaty of Friendship with the USA of 29 October 1954, even though this treaty already expressly provides for future expropriation “for the public benefit upon payment of just compensation”.
If the legal form of the American LLC is then chosen, the USA requires a permanent representative (Registered Agent) and a company address. The fact that the LLC is recognised abroad as a partnership for tax purposes by no means implies that it will be taxed as a corporation here in Germany. Such risks are often glossed over in the marketing.
The LLC – a hybrid
From a German perspective, an LLC can only be classified for tax purposes as either a partnership or a corporation. For this, the comparison of legal types (Rechtstypenvergleich) is carried out.
The tax authorities compare the specific structure of the LLC with our national criteria for partnerships and corporations, and then decide, from the German
side, how Germany treats the LLC for tax purposes. This should be secured in advance on a case-by-case basis.
As a partnership, the LLC is transparent. The members earn the LLC’s income directly and pro rata for tax purposes. As a corporation it would be non-transparent,
being itself a taxable entity as a body corporate.
Because of this independent German classification, a divergence can arise between the tax classification in America and in Germany – in the USA there is, after all, always the option to choose by means of “check the box”. This gives rise to a latent risk of double taxation in the case of the LLC.
The German concept of classifying the LLC according to the comparison of legal types was in itself developed for income taxation, but would then also have to apply to other
types of tax.
The member therefore holds an interest in either a corporation or a partnership.
The LLC as a partnership
The transfer of one’s own property is treated for tax purposes as a contribution of the plot of land out of private assets at book value. Insofar as rental income is generated
and the value corresponds to the participation quota, the case is unproblematic. As a rule, no real-estate transfer tax (GrESt) will be incurred.
It is not a gift to the LLC, insofar as the value of the contribution at the member’s level corresponds to his participation quota.
Where there is transparency, the member ultimately bequeaths his share of the assets (the value of his participation) later on – it nevertheless remains subject to inheritance tax with reference to two tax systems, with corresponding declaration obligations – in the case of a German property and a foreign company.
The LLC as a corporation
In this case, the contribution of the land is a disposal transaction that may be subject to income tax (§23 EStG (German Income Tax Act), or in the case of land held as business assets) and subject to real-estate transfer tax, just as it constitutes a gift to co-members insofar as the value is higher than corresponds to his participation quota.
What is later bequeathed is the interest in a corporation – likewise subject to inheritance tax.
LLC protection through the Treaty of Friendship?
Members, real estate, ongoing taxation – everything is entirely German.
In the intended scenario, there is nothing at all in the USA for tax purposes. Only the LLC’s place of incorporation is located there.
Presumably such a construct is not covered by the spirit of the Treaty of Friendship, which is to protect mutual national interests and not to place the other party in a worse position
than domestic nationals.
If Germany were to act decisively with a burden-sharing levy against such a construct, as is feared, no US interests whatsoever would be affected. The USA will, as one would expect, be relatively
indifferent to this.
The instrumentalisation of the LLC could be classified as an abuse of rights. One could then also say, somewhat maliciously, that we treat the construct in the same way as we treat comparable German constructs. The risk and effort bring alternatives into view.
The LLC trick via a trustee game of hide-and-seek
In international dealings involving financial transactions, including real estate, trust arrangements are an additional “temptation”. The marketing then promises that one has nothing more to do with the property at all – for protection against, for example, a burden-sharing levy. Tax authorities will endeavour to see through any camouflage constructs: trustees suspected in the relevant respect have featured for decades in the tax administrations’ databases. Legally, it is then often reasonable to assume a sham transaction and to examine possible money laundering.
The residential property in the GbR (BGB partnership)
So-called “asset-protection guides”, written by authors with hardly any relevant training, have long recommended the GbR (the BGB partnership under German civil law) as a solution for protecting one’s property from access by creditors. On 28 April 2011, the BGH (Federal Court of Justice) ruled (decisions, ref. V ZB 194/10 and V ZB 234/10) that a GbR can also be entered in the land register as owner, i.e. is capable of registration. GbR shares can be transferred informally – the transfer did not have to be entered in the land register: as a result, the land register tended towards inaccuracy – enforcement was certainly made more difficult, but had not become impossible. A subsequent sale was made considerably more difficult, for how could a buyer then still know which persons, at the time of notarisation, were reliably the true members acting as sellers?
Reform of the registered partnership under civil law (eGbR)
With effect from 1 February 2024, only registered BGB partnerships are capable of being entered in the land register, § 47 II of the Land Register Code (Grundbuchordnung, GBO, new version). Experts estimate that the previous number of real-estate BGB partnerships runs into as many as six figures. As a rule, one will in future no longer be able to get out of a GbR or eGbR anyway, even as a property owner – unless one dissolves the partnership, to which not all members will always agree.
Mandatory registration for the GbR from 1 January 2024
In practice, the land register is closed from 1 January 2024 to unregistered BGB partnerships; for in future these must first sign up or register in the company register; Art 229 § 21 EGBGB (Introductory Act to the German Civil Code).
Only after that are any changes possible, such as the transfer of ownership, encumbrance for instance with land charges, but also the later cancellation of mortgages
or the creation and cancellation of other rights – for example usufruct or rights of residence.
Particular effort is to be expected if a member dies, for when registering the not-yet-registered GbR all heirs must participate – no matter where in the world they may be.
This, however, requires examination in the individual case, for the new law on the eGbR already provides that death leads to withdrawal from the eGbR, § 723 I 1 BGB (German Civil Code), new version – a transitional provision ( Art. 229 § 61 EGBGB) would need to be observed in this respect. The current statutory rule provides that the GbR is dissolved upon the death of a member, § 727 I BGB.
It should be noted that the administrative seat of the eGbR must lie within the EU. Under the current legal view, this would rule out, for example, the only two GbR members being based in Switzerland, or perhaps in America as LLCs.
by Dr Johannes Fiala and Dr. Uwe Dörnbrack
by kind permission of
Invinity Magazin (published in Invinity Magazin, December 2023, pages 24 and 25)
and
www.experten.de (published in ExpertenReport 12/2023, pages 50 – 53)
If you would like to obtain further information on how you can secure your assets, for example in the event of a burden-sharing levy, by means of a life insurance policy or other constructs, read more in our article “Burden-sharing and creeping expropriation: how you should act now”
