Knowledge
21 Minute
In short: A foreign company does not become convincing simply by being duly established. The decisive factor is whether business activity, management, contracts, payment flows and the choice of country are economically compatible. The greater the distance between the company address and the actual activity, the more precisely the structure should be explainable and documented.
Understanding a foreign company – What matters is the actual place of management
A commercial register extract confirms the existence of a company. However, it does not answer where the company is actually run, where services are performed and why that country was chosen.
For entrepreneurs from Germany, Austria or Switzerland, the examination therefore begins in their own country of residence and activity. The following questions may arise:
- Where are the key decisions taken?
- Where does the entrepreneur actually work?
- Where are customers, employees and business partners?
- Who concludes contracts?
- From which location are bank accounts and cash flows controlled?
- What economic function does the foreign company perform?
In Germany, the place of management is the centre of senior business management. Companies with their place of management or registered office in Germany may be subject to unlimited corporate tax there. Relevant are: Section 10 Tax Code and Section 1 Corporate Tax Act. In Austria Section 27 Federal Tax Code and Section 1 Corporate Tax Act also use the registered office or place of management as connecting factors. In Switzerland, own rules apply, which must be checked before the implementation.
Geographical proximity is plausible – but no proof
A company in Hungary, Poland, Croatia or another neighbouring European state may be easier to explain commercially. Short distances, regional customers, suppliers, employees or regular projects can give a coherent overall picture.
However, geographical proximity alone is not enough. A Hungarian company also needs a real task within the business model. Conversely, a more distant company is not automatically problematic if it genuinely operates, invests, takes decisions or serves its own market.
The correct order is therefore:
- Define the business activity and objective.
- Define responsibilities and actual processes.
- Arrange review of the tax and legal consequences.
- Only then select country and legal form.
Those who form a company first and only later look for a justification, builds the structure in the wrong order. The article offers a broader overview Foreign company or real expansion?
Dubai Company and US LLC: The Problem Is Not the Country
A company in Dubai can serve a comprehensible purpose. This applies, for example, to actual activity in the region, own customers, local projects, employees, investments or verifiable operational infrastructure.
The arrangement becomes critical if almost everything continues to be done from Germany, Austria or Switzerland: acquisition, provision of services, contract negotiations, decisions and administration. A foreign billing address does not change these actual processes.
The same applies to a US LLC. Several trips per year are not a general legal test of substance. What matters is the overall picture of the activity. In addition, the American classification may not be transferred unchecked to the home country. The Internal Revenue Service may treat an LLC as a corporation, partnership or non-tax separate entity, depending on the number of members and the elections made. This is explained by the Internal Revenue Service’s LLC classification guidance.
What consequences arise in the country of residence and activity must be examined separately. Forming a US company does not answer any German, Austrian or Swiss tax questions.
Questions the entrepreneur should be able to answer
Before the establishment, a written plausibility review should take place:
- Purpose of business: What specific role does the company perform?
- Selection of countries: Why is this country suitable for the activity?
- Performance: Where are products developed, services provided or projects carried out?
- Decisions: Who makes the essential entrepreneurial decisions and where?
- Business partners: Where are customers, suppliers and project partners?
- Infrastructure: Which contracts, accounts, rooms, employees or service providers actually exist?
- Settlement: How are services between affiliated companies documented and billed?
- Obligations: Which tax, reporting, accounting and VAT obligations arise?
- Overall picture: Do website, bills, contracts, bank account and actual processes match?
- Evidence: Can the information be supported by ongoing documentation?
Good answers do not consist of an afterthought story. They result from the real business process.
Ongoing organisation therefore includes more than the formation deed and register extract. Contracts, evidence of services performed, invoices, minutes of important decisions, account movements and the allocation of tasks should also give the same picture. If these documents contradict each other, even an originally meaningful structure becomes difficult to explain. Documentation is therefore not a later addition, but a component of the company organisation.
Budapester tools: First the activity, then the country
The Budapester does not start with the question of whether Dubai, Delaware or Budapest sounds particularly attractive. It starts with the objective, ownership, place of management, customer structure, payment flows and practical feasibility.
Entrepreneurial practice shows that the difficult spot is rarely in the founding document. It appears later at account opening, bookkeeping, contracts, payment checks or at the question of who actually made a decision.
A robust structure connects several levels:
- a reasonable economic purpose,
- an appropriate legal form,
- clear responsibilities,
- documented decisions,
- functioning banking and payment channels;
- reliable accounting,
- as well as review by authorised tax and legal advisers.
The Budapester arranges these components, brings together processes and stakeholders and ensures that practical questions become visible before implementation. The binding tax or legal assessment is reserved for the respective licensed experts.
A good foreign company does not need a complicated history
The more simply a structure can be explained, the easier it is often to manage and document. An actual market, real customers, clear responsibilities and comprehensible decisions are more convincing than a collection of founding documents.
The central question is therefore not: Where can you quickly form a company?
The central question is: Which corporate structure demonstrably fits the activity that is actually to be carried out?
Those who answer this question cleanly before founding create a better basis for tax consultants, lawyers, banks, business partners and their own company management. The 75-minute Structure Check helps organise the objective, participants, country connection and outstanding review points before implementation.
Official sources
- § 10 Tax Code: place of management
- § 1 Corporate Tax Act: Unrestricted Tax Liability
- Austria: § 27 Federal Tax Code
- Internal Revenue Service: Limited Liability Company
Note: This post organises typical structural questions and does not replace legal or tax advice. The assessment depends on the individual case and the states concerned.
