Finally, we would like to clarify an important point which is often misunderstood and could potentially cause enormous tax damage: the tax status of an LLC in combination with residencies where
dividends are tax-free.
Cyprus and Portugal with their respective non-dom and NHR programs are some of the most popular places to have
tax residency in the European Union. These programs offer complete tax freedom on any dividends received (dependent on meeting certain requirements, of course).
Unfortunately, an LLC does not distribute dividends unless it operates as a C-Corporation, in which case it loses all of its tax advantages and dividends are subject to heavy withholding taxes.
An LLC is considered a “Disregarded Entity for Federal Tax Purposes” and is therefore fiscally transparent. That is to say, the owner pays
income tax in the country where he has his
tax residency. The problem with Portugal and Cyprus is that the personal income tax to be paid can rise considerably.
If you’ve been paying attention, you’ll say, okay, but this problem can be solved by having a tax-free
offshore company which owns the LLC. The LLC’s income goes to the
offshore company and from there is distributed as dividends to all the partners. After all, there are still enough offshore jurisdictions which are tax-free, despite the annoying guidelines on economic substance.
The problem with this is that the US LLC is only considered “disregarded” while it’s owned by a single individual. An LLC can have as many managers as it wants, but there can only be one owner, if not it will lose its special status and will have to pay taxes in the USA.