Best set up for US withholding tax optimization

[Cari]

Hi!

A company is doing e-commerce via the US LLC (fully taxed in the USA). The owner is the tax resident of Portugal under the NHR.
According to the DTT the withholding tax for dividends is 15%.
What is the best way to optimize the taxation?

I was thinking of the following:
US LLC is owned by Cyprus company. Withholding tax from US to Cyprus is 5%.
In Cyprus the incoming dividends are not taxed.
Cyprus pays dividends to the Portuguese tax resident. Under the NHR it is not taxed as well.
Thus, the total taxation is 21% of the CIT in the USA + 5% WHT=26%.

How do you see this set up? Do I miss something or it will work?

If you have any other suggestions, please share.

 

[Houdini]

For me it looks like the most tax optimized structures with the given parameters. I would get it proved by some local tax expert if I was in your shoes.

 

[Marzio]

Do I miss something or it will work?

You are missing the LOB clause in the US-CY treaty.

https://www.irs.gov/pub/irs-trty/cyprus.pdf

Your company will not be entitled to relief from taxation if the majority shareholder (> 75% shares) isn't a Cyprus resident.

 

[kekmaw]

You are missing the LOB clause in the US-CY treaty.

https://www.irs.gov/pub/irs-trty/cyprus.pdf

Your company will not be entitled to relief from taxation if the majority shareholder (> 75% shares) isn't a Cyprus resident.

You cut off the screenshot right where the US-CY treaty gets interesting though.

(2) Paragraph 1 shall not apply if it is determined that the establishment, acquisition and maintenance of such person and the conduct of its operations did not have as a principal purpose obtaining benefits under the Convention.

Meaning: If there is another reason to establish a company in Cyprus, besides just to receive treaty benefits, it can be motivated that your CY CO CAN qualify for treaty benefits without you residing in Cyprus. Takes careful planning obviously.

 

[Marzio]

If there is another reason to establish a company in Cyprus, besides just to receive treaty benefits

That's not obviously his case since it's a holding company.

The UBO should form a CY company, start some form of trading that makes sense BEFORE owning the US corporation and only then (maybe) will be entitled to the benfits of the treaty.

The danger is that it's a subjective decision so you'll never know if you'll be entitled or not.

 

[Xshore]

Hi!

A company is doing e-commerce via the US LLC (fully taxed in the USA). The owner is the tax resident of Portugal under the NHR.
According to the DTT the withholding tax for dividends is 15%.
What is the best way to optimize the taxation?

I was thinking of the following:
US LLC is owned by Cyprus company. Withholding tax from US to Cyprus is 5%.
In Cyprus the incoming dividends are not taxed.
Cyprus pays dividends to the Portuguese tax resident. Under the NHR it is not taxed as well.
Thus, the total taxation is 21% of the CIT in the USA + 5% WHT=26%.

How do you see this set up? Do I miss something or it will work?

If you have any other suggestions, please share.

Is the llc taxed as a normal llc or a corporation?

 

[mraleph]

I was thinking of the following:
US LLC is owned by Cyprus company. Withholding tax from US to Cyprus is 5%.
In Cyprus the incoming dividends are not taxed.
Cyprus pays dividends to the Portuguese tax resident. Under the NHR it is not taxed as well.
Thus, the total taxation is 21% of the CIT in the USA + 5% WHT=26%.

Whatever tax is first applied - either a federal CIT and after that other applicable taxes including WHT - that is not a proper percentage calculation as proportions are not summed. It's an error which may contribute to bad planning and loss.

Is the llc taxed as a normal llc or a corporation?

OP stated it's fully taxed entity and that optimized WHT on dividends is considered under DTT so an implication is that C-corp taxation is elected.

A definitive answer is given by @Marzio in post #5.