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Best management location for US LLC
- Thread starter JustAnotherNomad
- Start date
Apart from the fact that the UAE is a banana republic with unclear rules, and without knowing how the UAE would handle this (CIT is still very new, probably they don't know the answer to this themselves), if this "business in other parts of the world" is earned while traveling (no PE), then such profits would usually be seen as earned by the head office.
So for this to work, you would have to get the UAE to accept that there is a PE elsewhere that has the right to tax this income, and there would usually have to be a treaty.
For example, if the UAE company had an office in Switzerland, you may end up with a situation where Switzerland wants to tax the profits that can be attributed to that office, and then maybe you can get the UAE to accept that they shouldn't also tax those profits (as that would be double taxation, and there is a treaty).
But then the company would pay tax in Switzerland on that part of the profits instead.
I guess my question was more from a US tax perspective, if they would pursue tax on a federal level as 95% passes through tax free.
9% on profits, 0% on salary seems like a pretty good set up imo, with LLC + FZCO.
For the 0% and cost-dependent, would a holding company in vanatau make more sense? How about Bahrain where there's currently 0 corporation tax or limits on the amount one can take as well as no minimum stay conditions there.
Bahrain would be cheaper to set up in than Vanatau
9% on profits, 0% on salary seems like a pretty good set up imo, with LLC + FZCO.
For the 0% and cost-dependent, would a holding company in vanatau make more sense? How about Bahrain where there's currently 0 corporation tax or limits on the amount one can take as well as no minimum stay conditions there.
Bahrain would be cheaper to set up in than Vanatau
To get this, do you need a US LLC and also live in Dubai? There is no income tax in Dubai, so why go through the hassle of having a US LLC?
Probably yes. I tried to use it as an example of why this "Can't I just pay 5% in Dubai if only 5% of the business is conducted in Dubai" won't work without paying tax somewhere else.
You mean to have a transparent US LLC and only have 5% of the profits taxed in the US?
Then you would have to convince the IRS that only 5% profits are ECI. No idea how hard that would be, but good CPA's and tax lawyers from the US don't come cheap. You could probably forget about paying less than at least $400 per hour for their time, likely more.
If the US LLC is owned by a foreign entity that is not transparent (like a FZCO), there would also be 30% branch profit tax.
Say you make $10M profit with your transparent US LLC and you could get the IRS to accept that only 5% are ECI (big if), you would then first pay CIT on those 500k in the US.
Say the federal CIT is 21% (I believe Trump may have plans to lower it) and that the company only does business in tax-free states (in California, you would have to add another ~9% according to Google). So then you have 395k left. On this amount you then pay 30% BPT, so you only get $276,500 out to the FZCO. I'm not sure if this would then be taxed in the UAE again.
The other $9.5M would be taxable in the UAE anyway, which would leave you with $8,645,000.
So in a best-case scenario you would be paying $960k on your 10M profits, or 9.6%.
That's not very competitive. In Malta, you could be paying 5% and you would also lower the BPT to 5% or 15% (not sure), definitely much lower than with Dubai.
You could also try to shift profits through invoices (reducing the profit in the US further), subject to transfer pricing restrictions, but then you would also pay 9% in Dubai (instead of 21%+ in the US), or 5% in Malta.
It's just not a good idea to have ECI without treaty benefits, as the 30% WHT/BPT stings.
Not sure what you mean here. If you have ECI, you'll want to use a treaty country. But watch out for LoB clauses in the treaty.
Did you get a quote for a Bahrain setup?
There is no personal income tax (yet), but there is corporate income tax. Dubai would probably see the US LLC as opaque, so it would have to pay 9% CIT in the UAE. But enforcement is weak at the moment if you don't have an office or local customers in the UAE. If you just run the US LLC from your home in the UAE, they probably wouldn't know about this or try to tax the US LLC... yet. Good luck if they suddenly do, they will probably place you under a travel ban and hit you with huge fines or jail time. Lawyers are expensive in the UAE and there is no rule of law.
It's a really stupid idea to attempt such a setup in the UAE if you ask me.
You may be able to avoid this by having a manager for your US LLC outside the UAE though, which would bring us back to the original question of this thread.
What if it is sole owner, standalone LLC, an independent company?
I believe it's a c-corp which is 21% CT, on US income only all else remitted.
Will have a further look at Malta, assume there are no stay requirements?
yeah there are much better suited countries for this little "experiment".
Not sure what you mean. You mentioned that the US LLC would be owned by an FZCO.
You mean if it was owned by an individual directly? Then there would be no 30% BPT in the US. Everything else would stay the same.
+30% BPT (or lower treaty rate, but there is no treaty with the UAE) on any profits that are remitted to the parent entity.
Beware of LoB clauses in the treaty.
@A1988 @Marzio @daniels27 I have spoken to a Maltese tax lawyer.
Not surprisingly, the assumptions were not true. For income to be considered foreign income, it has to be linked to an asset outside Malta. For example, royalties or license fees arising outside of Malta - basically passive income. As usual. I have never seen any country treat income as "foreign" just because the customers are located somewhere else.
If it's regular trading income, the income would be treated as arising in Malta if the company is managed from Malta.
What's even worse with such a setup: This would likely be seen as branch income in Malta, subject to 35% tax, and it is possible, but would be much harder to obtain the tax refund for a branch of a foreign company.
It would be very interesting for me to see how your advisor justifies this @A1988, since you said you also declare some profits as remitted and taxable?
Long story short - it seems like you can't get lower than 5% in Malta.
Not surprisingly, the assumptions were not true. For income to be considered foreign income, it has to be linked to an asset outside Malta. For example, royalties or license fees arising outside of Malta - basically passive income. As usual. I have never seen any country treat income as "foreign" just because the customers are located somewhere else.
If it's regular trading income, the income would be treated as arising in Malta if the company is managed from Malta.
What's even worse with such a setup: This would likely be seen as branch income in Malta, subject to 35% tax, and it is possible, but would be much harder to obtain the tax refund for a branch of a foreign company.
It would be very interesting for me to see how your advisor justifies this @A1988, since you said you also declare some profits as remitted and taxable?
Long story short - it seems like you can't get lower than 5% in Malta.
Are you sure that CFC rules is about where shareholder is located? One of that C in CFC means contolled. By a legal definition, it means from where company is managed. Company does not be managed by a shareholders. Company is managed by a director in the most cases.
Yes.
No.
Seriously, just look up the CFC rules of any country and you will see I am correct.
Slovakia indeed has something about management in them, so this is a bad example.
But let's take Spain for example:
https://taxsummaries.pwc.com/spain/corporate/group-taxation
"[..] the Spanish parent company must own, individually or together with other related companies or individuals, over 50% of the non-resident subsidiary's share capital, equity, profits, or voting rights."
Here's France:
https://taxsummaries.pwc.com/france/corporate/group-taxation
"...more than 50% owned foreign subsidiaries and branches"
It's about ownership.
They call it control because the owner has the control over the other company. They can fire the board and put a new board in place - so even if they are not involved in the management of the company, they have power over the decisions of the directors (since they can just fire them if they are not happy).
I think he is talking about PE rules. CFC rules are irrelevant in 95% of the times we discuss anyting here. (It is similar to the tax certificate discussion we hold here where in 95% of all cases, the certificate is neither requested nor helpful.)
Yes, CFC rules are irrelevant because rules about corporate residence/PE already make the company taxable anyway. Those are about management/place of work.
I’ve tried reading through the thread to figure out what the actual solution to your question is. You live in Dubai, have a US LLC, and therefore pay the lowest possible tax namely, only income tax, which is 0% in Dubai as it stands now.
Isn’t that the solution?
Isn’t that the solution?
I asked specifically this question and this is the answer i got from @A1988: Malta sourced income is considered when a service is performed inside Malta and the payment is received from either a maltese resident individual or company.
@A1988 who gave you this defintion?
It works for him because he said he has an IP holding and investing company so it's 100% passive income.
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