Delaware company with a shareholder fiscally resident in Georgia (the country)

[Mark Ross]

Hi,

I would like some opinions on this scheme
1. a Delaware LLC generates some income for consulting services executed for EU beneficiaries (companies)
2. the Delaware LLC is owned by a person who is fiscally resident in Georgia (the country, not the US state)

In my opinion:
- the Delaware LLC is able to provide the EU beneficiaries with a certificate of fiscal residence, so that the EU beneficiaries do not have to retain any tax at source
- the Delaware LLC will not pay any tax on the income generated abroad (outside the US)
- the shareholder will not pay any tax on dividends on the income generated abroad (outside Georgia)

Provided that the shareholder is truly a resident of Georgia, it seems the end result is 0 taxes everywhere in a fully legal manner (no problem in showing your name), without having to deal with blacklisted countries or dubious banking...

Is this scheme feasible or am I missing something?

 

[JustAnotherNomad]

I’m assuming you are talking about a LLC taxes as a disregarded entity? In that case you wouldn’t be able to get a US tax residency certificate. For a LLC that is taxed as a corporation, you would probably be able to get a tax residency certificate, but then you would have to pay taxes.
If the LLC is taxed as a disregarded entity, you might not be able to get the income treated as dividends in Georgia. Residents of Georgia pay taxes on their income that is generated in Georgia (work carried out in Georgia). It does not matter where the clients are located.
In practice it might still work if nobody looks too closely, but you should definitely check everything with tax lawyers from all involved countries.

 

[khinkali]

Residents of Georgia pay taxes on their income that is generated in Georgia (work carried out in Georgia). It does not matter where the clients are located.

I have been wondering what happens if the LLC pays a salary for the work done in Georgia as a Permanent Establishment, but also makes a profit.

Tax would be due for the Georgian work, but what about profits that resulted from that work?

I guess the breakdown of work and profit could be hard to calculate and justify for consulting services.

 

[Mark Ross]

I’m assuming you are talking about a LLC taxes as a disregarded entity? In that case you wouldn’t be able to get a US tax residency certificate

Thx for your input.

Why do you think the LLC would not get a US tax residency certificate?
In my opinion the Delaware LLC is in reality a fiscal resident of Delaware (otherwise it would have to pay income taxes in the country where it is fiscally resident).
It is a fully fledged US entity which technically may offer services also within the US and - if it did - it would pay sales tax and income tax on income generated within the US.

 

[Mark Ross]

I have been wondering what happens if the LLC pays a salary for the work done in Georgia as a Permanent Establishment, but also makes a profit.

I would see no reason to pay a salary as long as all the profit of the LLC could be transferred as dividends to a personal account of the Georgian resident shareholder with (as far as I am understanding) zero tax implications. These dividends would be declared in the personal tax declaration in Georgia but the tax rate on this income is zero.

Once again. Am I missing something???

 

[khinkali]

These dividends would be declared in the personal tax declaration in Georgia but the tax rate on this income is zero.

Yes. But there is a separate tax because you are doing the work while physically in Georgia.

Even if you're not tax resident in Georgia, your company is outside Georgia and your customers are outside Georgia there is still tax to pay in Georgia if you do the work there. Given the ongoing nature of the work I expect that the LLC is taxed as a Permanent Establishment in Georgia.

If you just have some shares in Delaware and receive a dividend as passive income then it is not taxed in Georgia, even if you are tax resident.

The angle I'm unsure about is whether you can be taxed on the work but also generate profit. i.e. if your company charges $1000 per hour and pays you $100 per hour, I wonder if the $900 dividend is taxable or not.

 

[JustAnotherNomad]

Thx for your input.

Why do you think the LLC would not get a US tax residency certificate?
In my opinion the Delaware LLC is in reality a fiscal resident of Delaware (otherwise it would have to pay income taxes in the country where it is fiscally resident).
It is a fully fledged US entity which technically may offer services also within the US and - if it did - it would pay sales tax and income tax on income generated within the US.

LLCs can choose if they want to be taxed as a disregarded entity, meaning that the members of the LLC will be taxed directly (pass-through taxation). Or if they want to be taxed as a corporation.
If you choose pass-through taxation, if you as an individual are the only member, you will be taxed as if the LLC did not exist. For that reason, the US cannot issue a tax residency certificate either - unless you personally are a US tax resident. At least that is my understanding of it. If you as a non-resident alien don’t have to pay US taxes (because the work is performed outside the US), then neither does your LLC.
If you choose for the LLC to be taxed as a corporation, then all profits are subject to US corporate income tax, no matter where the work was performed. So then you might be able to get a corporate tax residency certificate, but you would also have to pay US taxes. You could of course try to claim expenses like salaries etc. to lower the profits of the business, but that would apply to any jurisdiction, not just the US.

 

[Mark Ross]

If you choose pass-through taxation, if you as an individual are the only member, you will be taxed as if the LLC did not exist. For that reason, the US cannot issue a tax residency certificate either - unless you personally are a US tax resident. At least that is my understanding of it. If you as a non-resident alien don’t have to pay US taxes (because the work is performed outside the US), then neither does your LLC.

Understood.
That was the part I missed and my scheme falls apart.
Thx anyway...

 

[Mark Ross]

If you just have some shares in Delaware and receive a dividend as passive income then it is not taxed in Georgia, even if you are tax resident.

The services would not be executed in Georgia.
Alas, @JustAnotherNomad explained what the hole in my logic is.
I now see that a US LLC is more similar to a "self employed" than a "company"

 

[khinkali]

The services would be executed in the US, not in Georgia.

If you mean that the people doing the consulting work for the clients are physically doing the work while in the US, then it's US income and you don't get the pass through tax benefits of the Delaware LLC. You have tax implications in the US state where they're working from.

If the consulting work is done in Georgia, then it is Georgian source income.

( by the way I think I've answered my question from above. it looks like profits from work done in Georgia are Georgian source income, not just the work itself )

 

[Mark Ross]

If you mean that the people doing the consulting work for the clients are physically doing the work while in the US, then it's US income and you don't get the pass through tax benefits of the Delaware LLC. You have tax implications in the US state where they're working from.

yes, you are right.
I misconsidered a Delaware LLC as similar to a European SRL/SARL/LTD/GmBH.
In Europe a LTD is one entity and its suppliers are independent entities, each with its own taxes (of course, with lots of exceptions).
I understand now that a US LLC is more similar to a European "Self Employed"/ "Sole proprietorship".

 

[JustAnotherNomad]

But it could still work in practice because sometimes there are so-called hybrid mismatches, meaning that the US might say “you need to pay taxes in Georgia”, but Georgia might say “isn’t that a LLC? Then you should pay taxes in the US”.
You could also look at HK companies for Georgia residency, that’s what Andrew Henderson is supposed to be using.
Generally there are many options, but there’s always a risk that if you don’t spend enough time in a country with territorial taxation, they don’t consider you tax resident. And if you do and you work there, the income is considered local and taxable.

 

[JustAnotherNomad]

yes, you are right.
I misconsidered a Delaware LLC as similar to a European SRL/SARL/LTD/GmBH.
In Europe a LTD is one entity and its suppliers are independent entities, each with its own taxes (of course, with lots of exceptions).
I understand now that a US LLC is more similar to a European "Self Employed"/ "Sole proprietorship".

You can elect for the LLC to be taxed as a corporation then it’s just like a Ltd./SARL. But then you’d also have to pay US corporate income tax.

 

[Mark Ross]

You can elect for the LLC to be taxed as a corporation then it’s just like a Ltd./SARL. But then you’d also have to pay US corporate income tax.

yeah, but it would be kinda shooting yourself in the foot...

 

[Mark Ross]

You could also look at HK companies for Georgia residency, that’s what Andrew Henderson is supposed to be using.

At this time, moving to GE would be an option.
The issue is that my main client (EU-based LTD) will require a certificate of fiscal residency of my entity in order not to retain (quite heavy) taxes in this country.
As you clarified (and - after your comment - I found the same info here IRS Form 6166: Certification of U.S. Tax Residency), the US does not issue this certificate to LLC's with non-resident shareholders, the US is not the proper jurisdiction.

I will look into HK. Thanks for the hint.

 

[Mark Ross]

But it could still work in practice because sometimes there are so-called hybrid mismatches, meaning that the US might say “you need to pay taxes in Georgia”, but Georgia might say “isn’t that a LLC? Then you should pay taxes in the US”.

I have the feeling that basing your offshore strategy on the ignorance of the bureaucrats is a thing of the past, unfortunately ...

 

[JustAnotherNomad]

HK wouldn't issue you a tax residency certificate either, so that won't help, I'm afraid.

Does your client care about where your company is registered?
If you're in IT, you could look into a Georgian freezone company. There is 0% corporate tax and only 5% tax on dividend payments. So in a worst case scenario (you can't get the money out any other way), you would be looking at 5% in taxes. I'm not sure how difficult it would be to get a tax residency certificate, worst case you'd probably have to higher one or two people, which shouldn't be too expensive.

Otherwise you could set up a Ltd. in any high-tax EU country (easy to obtain a tax residency certificate as in countries like UK, Germany, Estonia, ... Ltd. companies are by default tax resident where they are incorporated) and then lower your profits through service invoices or salary payments from that Ltd. company.
For example, say your client does not want to do business with a Georgian company. You incorporate a company in Georgia anyway, but you also incorporate a company in... France. Your French company is a sales branch for your Georgian headquarters. Then there has to be some profit in France (10% commission on all sales for example), on which you would pay French corporate income taxes. But everything else would be taxed in Georgia. The only downside to that is that tax offices are extremely sensitive when it comes to such arrangements (transfer pricing), so you'd need a good accountant/lawyer to make sure you fulfill all French requirements. You'd probably need substance in Georgia (tax residency certificate, office, employees) for that to work. But it would be perfectly fine and you could enjoy the reputation of the best jurisdictions.
The same would probably work by using a very high salary to reduce the company's profits.

 

[JustAnotherNomad]

I have the feeling that basing your offshore strategy on the ignorance of the bureaucrats is a thing of the past, unfortunately ...

No, it's not only about ignorance. Some countries have loopholes that would say "if it is a limited liability company registered in some other country, we always treat it as a foreign company". Because they don't have a concept where an entity could offer limited liability, but not be taxed as a corporation. In such cases it would simply be a loophole in the law. I believe the correct term is "hybrid mismatch" and it's of course a loophole that countries would try to close.

 

[khinkali]

Georgian free industrial zones have 0% corporation tax and dividends.

Virtual Zone has 0% corporation tax and 5% dividends. Only for IT service exports, but VZ is much cheaper and easier to get than FIZ.

 

[blizz]

Georgian free industrial zones have 0% corporation tax and dividends.

Virtual Zone has 0% corporation tax and 5% dividends. Only for IT service exports, but VZ is much cheaper and easier to get than FIZ.

does this still apply for Georgia? I don't think so, how can you take advantage of it without a bank account in Georgia?