Legal and Tax Frameworks: Germany vs. USA

The United States is an attractive growth market for many German companies. However, anyone wanting to establish a presence in the USA should familiarize themselves with the legal and tax framework early on. Unlike in Germany, jurisdictions, laws, and tax systems in the USA vary significantly by state.

1. Federal Structure: Four Levels of Jurisdiction

A crucial difference between Germany and the USA is the multi-level structure of US legislation. In the US, regulations exist at the federal, state, county, and municipal levels.

While federal law regulates key issues such as commercial and labor law or anti-discrimination, the states have extensive autonomy in areas such as corporate law, contract law, environmental regulations, building codes, and permitting procedures. Counties and cities can also levy their own requirements, taxes, or business licenses.

Before choosing a location, companies should carefully examine the legal and tax framework of the specific state and county under consideration. Tax rates can differ by several percentage points between states, and permitting processes for construction projects can also vary considerably.

2. Legal Framework: Unity and Diversity

The US legal system is heavily influenced by case law, meaning that court decisions in previous cases affect current proceedings. This aspect is a crucial difference between the German and American legal systems.

Many companies choose to work with an attorney when founding a new U.S. entity, ensuring they select the right legal structure and avoid potential complications in the future.

Some areas to consider during expansion:

• Product liability: Particularly strict in the USA; a thorough legal review of manuals and safety instructions is essential.
• Labor Law: Review regulations concerning minimum wage, working hours, and anti-discrimination laws at both the federal and state levels.
• Contract Law: Contracts in the US are generally more flexible than in Germany – however, standard contracts must comply with the respective state laws.

3. Business Formation: Fast, but Nuanced

Forming a company in the US is often faster than in Germany, but also more complex due to the multi-level structure.

Incorporation takes place at the state level, e.g., in Delaware, Texas, or Florida. It’s important to note that the company does not necessarily have to place its headquarters in the state where it is incorporated.

Popular legal forms include:

• LLC (Limited Liability Company): Flexible, limited liability, often treated as a "pass-through entity" for tax purposes.
• Corporation (Inc.): Suitable for larger investor structures, but subject to corporate income tax.

4. Tax Framework: A Multi-Tiered System

The American tax system is structured into several levels:

• Federal Taxes: Uniformly regulated at the federal level (e.g., corporate income tax).
• State Taxes: Each state has its own tax laws. Some states, such as Texas and Florida, do not levy income tax.
• County & City Taxes: Municipalities can also levy their own taxes, such as local sales taxes or business activity levies.

Unlike German sales tax, American sales tax varies not only in amount but also in its application to specific products or services. A thorough tax nexus assessment is therefore essential to determine your company’s liability by location. A Certified Public Accountant (CPA) can provide clarity in this regard.

5. Double Taxation and Compliance

The double taxation agreement between Germany and the USA generally prevents income from being taxed twice. Nevertheless, companies should establish tax structures early on that allow for a clear separation of profits and expenses between the parent company and its US subsidiary.

6. Accounting and Reporting

Accounting in the USA follows Generally Accepted Accounting Principles (GAAP), which differ from German accounting standards.

To optimally structure your transatlantic business and tax affairs, collaboration with a Certified Public Accountant (CPA) and a lawyer is essential. It's important to note the strict separation between tax and legal advice in the USA.

GACC South can assist you in networking with and contacting local law firms, tax advisors, insurance companies, and banks to ensure you have accurate information and a successful landing in the US.