Participation in a US American startup
June 10, 2009 | 80,00 EUR | answered by Michael Herrmann
I am a software developer and have developed an internet application in my spare time, along with two US colleagues, based on "sweat equity."
To market and further develop this application, we now aim to attract investors and establish a C-Corporation in the US. The corporation will be based in California.
I will receive approximately 20% of the founder's shares in the corporation and also plan to invest additional capital to acquire more shares.
I am a resident of Germany and subject to unlimited tax liability here. Currently, I am still employed by another company in Germany and earn income from an employed activity.
At least for the time being, I will not be employed by the corporation being established, but will continue to contribute to the development of our application in exchange for "sweat equity."
I am interested in the tax treatment of my founder's shares and the shares acquired through investment:
- What taxes apply in Germany to these shares?
- Are both types of shares treated equally for tax purposes, with only the profit from the later sale of the shares subject to taxation (capital gains tax), or must the allocation of the founder's shares also be taxed as income in Germany?
- If the founder's shares must be taxed as income, what are the rules for this?
- I suspect that I will have to pay tax on my shares in the US as income or capital gains. If that is the case, how does this affect taxation in Germany? Would German tax liability for the relevant income be waived and only the tax progression for my German income increase?
- From the perspective of German tax legislation, are there specific things that should be considered when allocating founder's shares?
Thank you in advance!
Dear inquirer,
First of all, thank you for your inquiry, which I would like to answer in an initial consultation based on the information provided and considering your minimum bet. The response will be based on the facts presented. Missing or incorrect information about the actual circumstances can affect the legal outcome.
As you reside in Germany, you are subject to unlimited tax liability in Germany. This means that you must pay taxes in Germany on your worldwide income.
By participating in the capital corporation to be established in the United States, there are two income sources that need to be distinguished for tax purposes: dividend income and the appreciation in the value of the company's shares.
Dividends are subject to German taxation according to § 20 para. 1 no. 1 EStG (Income Tax Act). The appreciation in the value of the company's shares is to be taxed upon sale either under § 20 para. 2 EStG (shares in private assets) as capital income or under § 15 EStG (shares in business assets) or § 17 EStG as commercial income.
No withholding tax will be levied, as the company is not a domestic debtor and there is no domestic payee involved. Therefore, taxation will be solely done through the income tax return.
Regarding foreign income, the issue of double taxation may arise if both countries have the right to tax. This is resolved through double taxation agreements. With respect to dividend payments, the United States has the right to impose taxes depending on the structure of the entitlement. These American taxes will be credited against German income tax. Therefore, dividends are fully taxable in Germany and are not subject to the progression clause.
The appreciation in the value of the company's shares will only be taxed upon sale. The profit is the surplus of the sale proceeds over the acquisition costs and selling expenses. The United States do not have the right to tax in this regard.
If you have held more than 1% of the company's shares within the five years prior to the sale, the income will be classified as commercial income under § 17 EStG. However, it is unlikely that this transaction will be subject to trade tax.
In principle, it does not matter for taxation purposes whether the shares are founding shares or later acquired shares. The only distinction is in case of a loss upon sale according to § 17 EStG, where the deductibility of the loss differs between founding shares and acquired shares.
The allocation of founding shares is a non-taxable event under German tax law. As a German tax advisor, I cannot assess the American tax implications as I am not authorized to do so. However, I do not see any relevance to matters relevant under German tax law in this regard.
I hope that these explanations have provided you with a sufficient overview of the situation and remain
Yours sincerely,
Michael Herrmann
Dipl.-Finanzwirt (FH)
Tax advisor
