Permanent Representative, Place of Management & CFC Taxation: What Really Applies to Your US LLC
Anyone running a business through a US LLC as a perpetual traveller or emigrant hears two opposing stories: inescapable German tax liability or «legally unassailable». Neither reflects the actual legal position. A sober look at the German AStG, AO and EStG – part 6 of our series on US company formation.
- ✛Section 2 AStG (private) and Section 5 AStG (company profits) are two separate tests.
- ✛Classifying the LLC as a corporation is usually an advantage: a permanent establishment, management or permanent representative in Germany is required.
- ✛For freelance activities, the isolating approach means working in Germany is enough.
- ✛The «permanent representative abroad» argument is well-founded but not confirmed by the Federal Fiscal Court.
- ✛Operational restraint in Germany and complete documentation remain the most important safeguards.
The basic structure: Section 2 and Section 5 AStG
Two provisions of the German Foreign Tax Act (AStG) are often confused, although they concern different levels:
- ✛Section 2 AStG – extended limited tax liability (private): anyone who was fully taxable in Germany for at least five of the ten years before leaving and moves to a low-tax country remains taxable for ten years on certain German-source income – such as interest on German accounts, not worldwide income.
- ✛Section 5 AStG – CFC taxation (business): builds on Section 2 AStG and tests whether your foreign company earns passive income that could be attributed to you personally.
These are two separate tests with their own conditions. Meeting one does not automatically mean meeting the other.
This article does not replace individual advice from a German tax adviser experienced in international tax law. The mechanisms described depend heavily on the individual case and should be reviewed before emigrating.
Entity classification as the starting point
German tax authorities use a 2004 Federal Ministry of Finance letter to assess whether an LLC resembles a partnership or a corporation. A classic manager-managed LLC with unlimited duration and limited liability is predominantly classified as an opaque corporation in practice – as already described in our fact check on the capital levy LLC.
This brings a structural advantage: for business income under limited tax liability, Section 49(1) no. 2 EStG applies. It requires a fixed permanent establishment, business management or a permanent representative in Germany – merely carrying out the activity occasionally is not enough.
Automatic commercial character under Section 8(2) KStG applies only to corporations with unlimited tax liability, i.e. normally German GmbHs. An LLC with its seat and management abroad does not automatically fall under it.
The isolating approach: a real risk
Under Section 49(2) EStG, features existing abroad are disregarded if taking them into account would rule out German-source income. If work is actually done on German soil, the tax office can mentally disregard the LLC's foreign legal form and assess the activity alone.
For liberal professions under Section 18 EStG – listed professions and similar activities such as qualified software development, original content creation or individual graphic design – merely performing the work in Germany is enough to trigger limited tax liability.
- ✛Freelance activity: consistently refrain from operational work during stays in Germany.
- ✛Trading, affiliate marketing, standardised agency services: benefit more from the higher protection of Section 49(1) no. 2 EStG.
The EUR 100,000 threshold and harmful participation
The threshold under Section 9 AStG is often cited: passive income below EUR 100,000 that makes up no more than a third of total company income is disregarded. For perpetual travellers who provide services themselves through the LLC, this is usually irrelevant.
Under Section 8(1) no. 5 AStG (harmful participation), services in which the controlling shareholder participates count as passive. The LLC's income is therefore regularly 100 % notionally passive – the one-third limit is exceeded from the outset.
The central argument: permanent representative abroad and Section 34d EStG
Section 5(1) AStG requires cumulatively that the income is passive and does not constitute foreign income within the meaning of Section 34d EStG. The argument: anyone living abroad and managing their LLC's business there on a lasting basis is themselves a permanent representative (Section 13 AO) abroad. The income would then be foreign permanent-establishment income under Section 34d no. 2(a) EStG – and attribution would not apply.
The Federal Fiscal Court ruling of 23 Oct 2018 (I R 54/16) is cited as support: a managing director can, as a corporate body, also be the company's permanent representative. This preliminary question is therefore settled.
However, the facts concerned the reverse case: the managing director of a Luxembourg company acted in Germany and thereby pulled the company into German tax liability. Whether representative activity abroad rules out attribution under Section 5 AStG has, according to our research, not yet been the subject of a published Federal Fiscal Court ruling.
The argument is therefore not wrong, but a well-founded legal position consistent with the statutory text – one that would, however, first have to be enforced in a dispute. Anyone basing their tax planning on it should build robust evidence of activity abroad, contracts and travel patterns.
Place of management (Section 10 AO)
The Federal Fiscal Court defines the place of management as where the decisive will for day-to-day business is formed (e.g. ruling of 5 Nov 2014, IV R 30/11). If several places are possible, they are weighted by importance. A short visit home generally does not shift the centre of a genuinely travelling entrepreneur.
The fallback rule in the AO administrative guidance is important: if the place cannot be determined due to lack of cooperation or evidence, the authorities use the managing director's residence instead. Incomplete documentation therefore does not automatically lead to a favourable outcome. Automatic digital documentation – flights, accommodation, payments abroad – makes a clear point of connection abroad credible.
Binding ruling and declaration of findings
| Instrument | Assessment |
|---|---|
| Binding ruling (Section 89 AO) | Subject to fees, binding only for the exact facts described – hard to tailor to a changing lifestyle |
| Declaration of findings (Section 18 AStG) | Whether a filing obligation exists without substantive attribution is disputed; the authorities lean towards a broad obligation |
Both questions require weighing up and should be decided with a tax adviser – also depending on how conservative your approach should be.
What this means in practice
- ✛Classification as a corporation is mostly advantageous, as it opens the stricter standard of Section 49(1) no. 2 EStG.
- ✛For freelance activities, the isolating approach remains a real risk as soon as work is done in Germany.
- ✛The representative argument is legally sound but not a guarantee confirmed by the highest court.
- ✛The burden of proof for tax-triggering facts generally lies with the tax office; you prove activity abroad via your digital footprint.
- ✛Operational restraint in Germany – no contract signings, no provable professional work – remains the most important safeguard.
How SWICOR supports you
SWICOR specialises in the US side of the structure – from choosing the state through formation to ongoing compliance (see also Form 5472). For the German tax side, we refer you to experienced German tax advisers specialised in international tax law. Together we align your US LLC structure with your travel and documentation practice so that the protective arguments hold if challenged.
Set up your US LLC robustly from day one.
Company formation USA →Frequently asked questions
Does my US LLC automatically trigger German CFC taxation when I emigrate?
Not automatically. Section 5 AStG requires that you fall under Section 2 AStG, that the income is passive and that there is no foreign income under Section 34d EStG. If the last condition is not met – for example through a robust role as permanent representative abroad – attribution does not apply.
Has the «permanent representative abroad» argument been confirmed by a court?
The Federal Fiscal Court confirmed that a corporate body can also be a permanent representative (I R 54/16) – but in the reverse constellation. Applying it to perpetual travellers is well arguable but, according to our research, not yet the subject of a specific ruling.
What happens if I work briefly during a visit home?
It depends on the activity. For business income of an LLC classified as a corporation, a permanent establishment, management or permanent representative in Germany is required. For freelance activities, performing the work locally is enough.
Do I need a declaration under Section 18 AStG if no tax is due?
This is disputed. The authorities lean towards a broad filing obligation; a narrower reading based on the statutory wording is also arguable. Decide this with your tax adviser.
Should I obtain a binding ruling before emigrating?
Not necessarily. It is costly, tied to the exact facts and loses effect if reality deviates – often hard to tailor to a changing lifestyle.
Make your LLC structure robust
We set up the US side properly and connect you with specialised tax advisers for the German side.
This article is a general analysis and does not replace individual tax or legal advice. Regulations change; the information reflects the status at the date of publication.