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Ask HN: Should a German founder with a green card set up a holding company?

39 points by ck_one ↗ HN
In Germany, founders usually hold their shares in a holding company. This has the benefit that at an exit event you only get taxed 5% if you keep the exit money in the holding company. You can make investments (angel, real estate etc) from your holding company. Only when you withdraw money from the holding company you have to pay personal tax.

I am curious do US founders do something similar? Does my situation change because I own a Greencard and will incorporate in the US? Most importantly has anybody recommendations for good German/US lawyers?

39 comments

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TekMol
Can you put your business into a holding company later on, or does it have to be done before you launch?
moonlighter
In the US you can start an LLC "a" and later on a Holding LLC "b" and make "b" the owner of "a", so that "b" is the parent (and holding company) of "a". It's really just about how ownership is structured, and it can be done later on.
Wronnay
You can also do it later on.

If you are the sole owner, then you can also do all of that in one business. I have my operational side and investments (like stocks) in the same company.

My plan is, to spin operational businesses off as soon as the legal risk gets too high or as soon as I seek for other 3rd party investors.

seppel
> You can also do it later on.

In Germany it is tricky to do it later and is a taxable event.

noodlesUK
In which jurisdiction would you be starting the main company and the holding company? You mentioned you’d incorporate in the us, but for which entity? Both? I strongly recommend against a US person including non-resident citizens owning a foreign company, especially as a holding company or similar because the compliance is effectively impossible to manage without thousands of dollars in accountancy (see IRS form 5471).

Does Germany tax non resident citizens (almost certainly not only the US does)? If so, ignore Germany if you’re planning on staying in the US for the next 10ish years. Germany and the US will almost certainly have a variety of tax treaties, and once you’ve paid US tax on the income it’ll be yours free and clear if you want to later return to Germany.

If you’re planning on returning to Germany before the company is likely to have exited, you will definitely need strong legal advice and this may cost $$$.

I am not a lawyer or financial professional this doesn’t constitute advice

Nashooo
>Does Germany tax non resident citizens (almost certainly not only the US does)?

I think only on income or assets generated in Germany whilst abroad. I do believe the US is one of the only (if not the only) countries that taxes non residents on their income generated abroad.

mrunkel
No, I’d you don’t have tax residency in Germany, you don’t pay income taxes in Germany. Independent of citizenship.

Only the US and Somalia levy income tax on non-resident citizens.

germanier
Certain kind of income is taxed even without tax residency (so-called beschränkte Steuerpflicht). This is independent of citizenship though.

Only for public servants working and living abroad German citizenship is relevant when it comes to taxation (this concerns mostly diplomats and such).

davchana
& the only other country is Eritrea.
tazjin
> almost certainly not only the US does

You are right - there is another country that has citizenship-based tax (Eritrea).

ck_one
The idea was to incorporate the main company in the US as a Delaware C and the holding company in Germany.
noodlesUK
My strong suggestion would be to avoid doing this. The compliance hoops the US will make you jump through if you are a significant US owner of a foreign corporation (the holding company) will hurt. You likely wouldn't owe any taxes, though you never know with GILTI, but you'd be spending at least 3-10k USD per year on accountancy just to file the books for the German company with the US most likely.

If you're planning on making your money in the US in any case, you might want to just set up a US holding company, or just holding the assets directly.

If you do anticipate moving to Germany any time soon, also be aware of the US expat/exit tax, which is a kind of capital gains tax that triggers when you become non-subject to US tax jurisdiction. I can't really explain it much in an HN comment.

Expat Tax: https://www.irs.gov/individuals/international-taxpayers/expa... https://www.goldinglawyers.com/what-is-expatriation-us/

Form 5471 (one of the forms the IRS makes you file with respect to the proposed German holding company): https://www.irs.gov/forms-pubs/about-form-5471 https://www.goldinglawyers.com/form-5471-filing-rules/

Also as an aside, make sure you file FBARs (as an individual) and Form 8938 if you still have German accounts/assets that meet the criteria (they are different).

https://www.irs.gov/businesses/small-businesses-self-employe... https://www.irs.gov/forms-pubs/about-form-8938

The US is extremely mean to people with international connections. It's very difficult to remain compliant, but as a business owner you are significantly increasing the likelihood that you will be audited, so it's best to try to keep things as compliant as you can.

Get a tax pro. Anyone who has any connections with another country will need one, just to talk to if nothing else.

Again, I'm not a lawyer or a tax pro, just a sad dual-citizen who has been screwed by US tax compliance before...

jsty
Unsure if it works exactly the same in the US, but in the UK there are ways to set up a holding structure via a share-for-share exchange and get pre-clearance of tax neutrality from HMRC (the tax authority).

If so, you can defer the decision on structuring to nearer the liquidity event when you should be able to get professional advice to implement the optimal structuring for you at the time.

splix
Slightly offtopic, but in US how you should go if you want to do small investments in other companies or just assets? Like angel investing.

Should I set up an independent LLC just to simplify account on my personal taxes? Would be it be easier or more complex in this case? How it's taxed? How it's usually done?

0xfaded
Google mega-backdoor Roth IRA
mercutio2
I agree that a mega-backdoor Roth is a potential approach, but to be clear, there are a LOT of hurdles that your 401k administrator has to jump through to allow this, so it's an example of an "if you're lucky enough to have an amenable 401k provider" suggestion, not an "everyone should do this" suggestion.

Angel investing from a Roth account is a more universal possibility; not all Roth administrators allow arbitrary investments, but you can roll over Roth balances to an IRA that does all this.

yieldcrv
The greencard doesn't really matter except for making it simpler to get a tax ID for your new company in the US. but its not really a hurdle or benefit or factor, since non-greencard non-citizens can be tax persons to the US, which is really the most complex part.

The holding company is just for limited liability, as well as being incorporated domestically in the US simply makes it more familiar for banks and the target companies to work with.

So should you? I think everyone should, just for the consolidating and separation of assets. Being able to transport a name and address that's not yours. (ie. you can be in Miami partying all the time, while your super serious Delaware holding company has the super serious Silicon Valley office address and upholds the stoic investing brand)

The US doesn't have those specific tax benefits for doing it, but there are many others, which may be enhanced by the holding company, but not necessarily.

ck_one
Interesting, thanks for your comment. The question is then if the US will also tax my German holding company even if I don't withdraw any money from it to my personal account. If the US also taxes my holding company as if it were my personal income then there is no point in setting up a holding company for which I have to fly to Germany to make the signature ;)
yieldcrv
okay the jurisdiction of the holding company wasn't clear

there are many permutations and variants that you aren't considering, you should contact a US CPA or US tax attorney, that has experience in international tax issues

mousetree
For a German resident with options in a US company, would I also be able to transfer those options to an UG and then get taxed 5%?
daanlo
I am neither a lawyer, nor tax advisor, but my layman understanding is: If you transfer them (as in, you already own them as a private person and give/sell them to your UG), you will generate a taxable event where you might have to pay personal income tax on the current market value of the options. You probably don‘t want this to happen. If you don‘t yet own them, then you might be able to set it up with your employer that shares are held my your holding. There are some explicit rules around being actively involved in the company and whether the 5% rule applies. I don‘t know the latest status quo of this and whether employee options would generally qualify for the 5% rule. You only pay 5% of the tax. So if the corporate tax rate is 20%, your effective tax rate is 1%.
ck_one
That's a good question! I don't see a reason why it shouldn't work. There shouldn't be a difference between a founder holding shares and an employee holding shares. Not sure how options play into it though.
konha
You have to own at least 10% of the company for the so called „Schachtelprivileg“ (5% tax). Don‘t think this applies to options at all.
ck_one
Oh you are right. Do you know why there is the 10% threshold?
konha
No idea, sorry. Just something I remembered.
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gumby
If you have a green card (I do) you're subject to US tax laws and a holding company doesn't buy you anything. You may want to put them into a trust, though, however you can decide when you want to do that (if you are single it's in almost every case not worth it) because putting your assets into a trust for your benefit isn't a taxable event.

Incorporate your companies in the US. Since 2017 the US is a "low tax" regime for corporations and anyway, you'll presumably be actually doing business here so you'll need a US (delaware) corp. Don't make your life unnecessarily more complicated.

I have lived in Germany but only had to deal with German salary. I didn't need to tell them anything about my assets outside German. Of course tax law can have changed. But if you don't intend to go back to Germany then only the US tax case matters.

In general I make little effort to try to minimize my taxes. Instead I just live my life.

fsckboy
other people are answering you with more knowledge than I have, but a slightly little off-the-wall suggestion, depending on where you need to be, there is a great tax incentive within the US to set your business up in Puerto Rico, but you need to spend a significant amount of time there. However, being an island in the Caribbean, that might be considered a bonus.
sassy_quat
Superficially, you seem misinformed. Matter of factly, a great problem would be that you're requesting advice on tax evasion on a public forum.
pestatije
"minimization" it is called
sassy_quat
I don't think evasion is illegal, it isn't the same as draft dodging.
ck_one
I am still in team Europe and believe that taxes are important and that rich individuals can't take better care of public infra. I just don't want to make stupid mistakes at the beginning with my company structure.
mercutio2
Tax avoidance is perfectly legal. There's nothing wrong with getting tips on what to research on a public forum.

I don't think the US offers any trusts that are tax-efficient in the way the questioner would like, but I'd be interested to know if I'm misinformed!

purplepatrick
The answer is No (as you can easily confirm by googling this). You should hold the shares personally.

Holding your shares through a US entity is not an advantage. Holding your shares through a foreign entity will cause you to get penalized if you continue to remain a US tax citizen.

The only situation where I could see an advantage would be if shares were held through a foreign entity and you hold them there (without an liquidation event) until you have surrendered your greencard and no longer meet the substantial presence test for US tax purposes and the resulting tax situation for you would be better than it was when you were a US citizen for tax purposes.

For example, if you held equity through, say, Malta, Panama, or the Caymans and you leave the US permanently, surrendering your greencard, and become a resident of a tax-advantaged jurisdiction for long enough that you are no longer taxable by the US, and only THEN your company exits, generating capital gains that could/would be distributed to you would be tax advantaged.

ck_one
Do you know how you would get penalised?

Is there no similar instrument in the US which allows you to not withdraw money & delay the taxation event?

purplepatrick
You’d have to ask a tax attorney, but this exact scenario happened to a friend of mine who held his equity through a foreign entity. When he wanted to cash out, he was hit by an extra US tax penalty specifically for when you hold your equity through a foreign entity.

I was in the same boat as you when I started my company and looked into the same kind of setup. I researched it at the time but cannot remember the details.

FunnyBadger
Don't take advice from the internet. Talk to a lawyer who has experience with business start-ups and is willing to consult with an immigration attorney if that ends up mattering.

In general, having a Green Card making you the same as a citizen when it comes to taxes, liability, etc. So it's actually more a business-specific and personal finance specific question as a founder.

You probably want to establish a corporation regardless. California is pricey for LLCs but other states like NY are actually dirt cheap to establish. You can do more complex incorporation but only an attorney can really tell you what makes sense.