US DISREGARDED LLC - PASSTHROUGH QUESTION

[SmartestSmarty]

Hello all,

I have a question about single member LLCs.

As these are not considered for federal tax purposes, do they allow the receipt of the revenue by the LLC to be paid out later in the form of dividends, or as they are disregarded, is it expected that all revenue is received immediately by the beneficial owner and tax paid in the beneficial owner’s jurisdiction in the tax year it has been received?

If it is the case that the income received cannot be paid out of the LLC as dividends, the single member LLC structure seems pointless.

If this is the case, is there another way to receive the funds to pay out at a later date, such as a trust or qualified intermediary structure? I am not too familiar with these, I would not want to give control to someone else to manage anything on my behalf.

 

[Sols]

Under US law, income earned by a pass-through LLC is considered personal income for the members of the LLC. You can't really defer taxes with an LLC.

You could have a holding company own the LLC, if you want to have an LLC but also want to have the option to defer taxes. You can also opt to have your LLC be treated like a corporation (opaque and taxable).

Exactly how these things are treated in your place of residence is a question to be raised with a local tax adviser. There's a chance they don't know, though. It's not always clear if an LLC is viewed as a pass-through entity. Canada, for example, considers LLCs to be opaque (not transparent, not pass-through).

 

[Forester]

Canada, for example, considers LLCs to be opaque (not transparent, not pass-through).

It can be surprising for someone but the company regulation in Canada differs remarkably from the US one. And it varies across the provinces, too. E.g. an equivalent for a US LLC exists only in BC (and maybe in some Maritime province, I do not recall) and it is called LLP.

 

[daniels27]

As these are not considered for federal tax purposes, do they allow the receipt of the revenue by the LLC to be paid out later in the form of dividends, or as they are disregarded, is it expected that all revenue is received immediately by the beneficial owner and tax paid in the beneficial owner’s jurisdiction in the tax year it has been received?

If it is the case that the income received cannot be paid out of the LLC as dividends, the single member LLC structure seems pointless.

Yes, I totally agree with you.

If this is the case, is there another way to receive the funds to pay out at a later date, such as a trust or qualified intermediary structure? I am not too familiar with these, I would not want to give control to someone else to manage anything on my behalf.

Yes, I would recommend using a company in a tax-free jurisdiction for that purpose.

But back to the most important question. Why open a US LLC in the first place?

• You are permanent traveller without tax residency
• You have a company in a country without access to good banking (or need the company to fulfil some other registration requirements)
• You have operations in the US and are subject to tax there

Any other valid use case? Maybe not. At least not legally. A German resident cannot use a US LLC (apart from the second point) in any way, it only creates tax problems.

In my personal opinion, there is a lot of hype around those LLC but most of it is hoping that you are never caught by your local tax administration. I would not recommend doing this.

 

[Forester]

But back to the most important question. Why open a US LLC in the first place?

• You are permanent traveller without tax residency
• You have a company in a country without access to good banking (or need the company to fulfil some other registration requirements)
• You have operations in the US and are subject to tax there

Any other valid use case?

I'd add one more (and there might be another, perhaps)
– You are a freelancer but now you need to act as a company from a reputable jurisdiction for some reasons (e.g. some business opportunity that is available for companies only; or you have a really “bad passport”).
Then one-member US LLC is usually the simpliest and cheapest solution (unless you do not want to have any links with Uncle Sam )
(But it's a little bit similar to the second point, true.)

In my personal opinion, there is a lot of hype around those LLC but most of it is hoping that you are never caught by your local tax administration. I would not recommend doing this.

I second this.

 

[SmartestSmarty]

I am in the UK, I receive some royalty income from the US, under the double tax treaty there is no withholding tax. But I am then taxed on the full amount in the UK.

I simply want to find the most appropriate method of limiting my tax exposure. I do not seek to evade tax, I want to be efficient and limit my tax liability.

 

[daniels27]

Then just open a British limited.

Adding an offshore company won't make sense as you will lose the treaty benefits.

 

[Cloudbanck]

I'd add one more (and there might be another, perhaps)
– You are a freelancer but now you need to act as a company from a reputable jurisdiction for some reasons (e.g. some business opportunity that is available for companies only; or you have a really “bad passport”).
Then one-member US LLC is usually the simpliest and cheapest solution (unless you do not want to have any links with Uncle Sam )
(But it's a little bit similar to the second point, true.)

I second this.

Yet one more:
-You live in a country that formally or de facto doesnt tax foreign companies. About half the world is like this. And as to PE/effective management and control, this is often a bit of greyzone, since these countries have just let it be, and there are no court cases of authorities claiming some foreign company had PE in the country. But if one wants to be on the safe side, it's easy to set up PE/substance in a country one doesn't live in.

 

[daniels27]

Yet one more:
-You live in a country that formally or de facto doesnt tax foreign companies. About half the world is like this. And as to PE/effective management and control, this is often a bit of greyzone, since these countries have just let it be, and there are no court cases of authorities claiming some foreign company had PE in the country. But if one wants to be on the safe side, it's easy to set up PE/substance in a country one doesn't live in.

Yes, that is hoping to not get caught as semi perpetual traveller. You just stay in some country you weren't born in for a couple of years and then leave. You can even do this in Germany or the US (not with their LLC) for 3 years and you probably won't get caught unless you show off in a too small town.

 

[Cloudbanck]

Yes, that is hoping to not get caught as semi perpetual traveller. You just stay in some country you weren't born in for a couple of years and then leave. You can even do this in Germany or the US (not with their LLC) for 3 years and you probably won't get caught unless you show off in a too small town.

Well, I meant more places like Namibia, Zambia, Botswana, DRC, Djibouti, Guinea-Bissau that formally don't tax foreign income.

Or the countries that are so disorganized that formal rules around foreign income are not clear, but nobody would dream of paying tax on such income. And if you go to a tax office to declare such income, they look at you like you are crazy, think you must be retarded, and then negotiate to take 10% of your income, obviously directly into their own pockets. (Have a friend who did just this, once, before wisening up)

So if you combine the above with a PE in a different country just in case, it's a pretty solid set up.

But yeah, if you do this in a western high tax country, it's a hoping you don't get caught strategy.

 

[SmartestSmarty]

I’m not looking for methods by which
‘I won’t get caught’.

An ltd in the UK will work out tax wise almost exactly the same as just paying tax as an individual. When you had up corporate tax + dividend tax.

Then just open a British limited.

Adding an offshore company won't make sense as you will lose the treaty benefits.

This is what im trying to work out, you don’t lose treaty benefits as the beneficial owner is from a tax treaty country.

I think I have to set up a trust or qualified intermediary in a tax free zone, to receive the finds on my behalf. Then they pay them to me as and when I request.

 

[daniels27]

Haha. What works in Germany for 3 years, works in South Africa for 30 years and in Namibia for 300 years. It is all the same concept and all good under my point one of perpetual traveller. You remember, most African and even central Asian populations were nomads. Perpetual travellers. That's why it works there. As long as you are not born there and don't show off.

If you are born there, you better go to the UK as 50% tax is still less than those 100 aunts and uncles that want their share of the "family" wealth.

 

[Tetiana]

I receive some royalty income from the US

If you can move to Ireland under non-dom you'll be tax free. BTW are you receiving royalties from youtube? I'm looking for a similar setup but unwilling to spend 183 days in a treaty US country just for the sake of obtaining treaty benefits.

 

[daniels27]

I’m not looking for methods by which
‘I won’t get caught’.

An ltd in the UK will work out tax wise almost exactly the same as just paying tax as an individual. When you had up corporate tax + dividend tax.

Which is what you are supposed to pay.

This is what im trying to work out, you don’t lose treaty benefits as the beneficial owner is from a tax treaty country.

I think I have to set up a trust or qualified intermediary in a tax free zone, to receive the finds on my behalf. Then they pay them to me as and when I request.

Your problem is that either the intermediary is basically disregarded, i.e. you pay tax in the UK as if it was a UK limited, or it is a distinct company in which case you are limited to other jurisdictions with a good treaty and you need economic substance with a director there. And then you know what? You still need a treaty between that jurisdiction and the UK, so that you don't have withholding taxes on the dividends.

If you make over 100k per year, it may make sense, but otherwise you probably end up paying to much for the intermediary to pay off.

United States - Corporate - Withholding taxes

Detailed description of corporate withholding taxes in United States

taxsummaries.pwc.com

There is not much with 0% but the usual suspects with Ireland and Malta may be worth looking into. It won't come free unless your uncle lives there and opens the company for you.

If you can move to Ireland under non-dom you'll be tax free. BTW are you receiving royalties from youtube? I'm looking for a similar setup but unwilling to spend 183 days in a treaty US country just for the sake of obtaining treaty benefits.

You need to read the treaty. Spending 183 days usually is not a condition. If you leave your family elsewhere, it still counts as your country.

In the other side, as mentioned above a company with a director in a more favourable country usually helps. But it won't be 0 with all the costs.

You could run it through a Swiss company while paying out the majority as salary or royalties to you.

 

[SmartestSmarty]

Which is what you are supposed to pay.


Your problem is that either the intermediary is basically disregarded, i.e. you pay tax in the UK as if it was a UK limited, or it is a distinct company in which case you are limited to other jurisdictions with a good treaty and you need economic substance with a director there. And then you know what? You still need a treaty between that jurisdiction and the UK, so that you don't have withholding taxes on the dividends.

If you make over 100k per year, it may make sense, but otherwise you probably end up paying to much for the intermediary to pay off.

United States - Corporate - Withholding taxes

Detailed description of corporate withholding taxes in United States

taxsummaries.pwc.com

There is not much with 0% but the usual suspects with Ireland and Malta may be worth looking into. It won't come free unless your uncle lives there and opens the company for you.


You need to read the treaty. Spending 183 days usually is not a condition. If you leave your family elsewhere, it still counts as your country.

In the other side, as mentioned above a company with a director in a more favourable country usually helps. But it won't be 0 with all the costs.

You could run it through a Swiss company while paying out the majority as salary or royalties to you.

I was considering Gibraltar.

In the tax act they have no tax on foreign sourced income under an LTD, but this does not apply to royalties, unless it is an intermediary. IRS allow for non-qualified intermediaries to act as withholding agents, and use the beneficial owner to determine the withholding tax rate.

Gibraltar also have a DTT with the UK.

Do you think this could work?

What I am trying to work out with this potential solution in Gibraltar, is if I own the intermediary myself, does that then not make it an intermediary, and will I need to register the company in someone's name (eg. my partner) to make it an intermediary.

The tax act 9.(1) states: the company will only be treated as the beneficial owner if the royalties received are for its own benefit and not on behalf of some other person.

The royalties are for my benefit, the IP is held in my name. The company would merely be an entity to collect the payments.

I am also confused somewhat on the difference between a qualified intermediary (QI) and a non-qualified intermediary (NQI). Can anyone elaborate to make the distinction clear?

 

[Tetiana]

It won't work, you are not considering) limitation of benefits clause in the US-UK tax treaty (art23).

https://assets.publishing.service.gov.uk/media/5a81972ce5274a2e8ab54ce7/usa-consolidated_-_in_force.pdf

 

[SmartestSmarty]

It won't work, you are not considering) limitation of benefits clause in the US-UK tax treaty (art23).

https://assets.publishing.service.gov.uk/media/5a81972ce5274a2e8ab54ce7/usa-consolidated_-_in_force.pdf

I read through that, I cannot seem to work out the reasons why it would not be allowed. At least if someone else if owner of the company in Gibraltar, but even if it were myself. Can you explain why it doesn't work?

 

[Tetiana]

Lets do the reverse, under which paragraph do you think your UK LTD will pass the limitations on benefits test?

Those tests are put in place to limit treaty shopping which is exactly what you want to achieve by using a UK LTD company to collect royalties and transfer those to the Gibraltar company without paying UK taxes.

 

[SmartestSmarty]

Lets do the reverse, under which paragraph do you think your UK LTD will pass the limitations on benefits test?

Those tests are put in place to limit treaty shopping which is exactly what you want to achieve by using a UK LTD company to collect royalties and transfer those to the Gibraltar company without paying UK taxes.

No I didn’t say use a UK LTD to transfer royalties to a company in Gibraltar.

If I was not clear, what I was saying is: A company incorporated in Gibraltar, to act as an agent, to collect the royalties on my behalf (the beneficial owner) to then pay tax in the UK on the royalties received from the Gibraltan company. (The purpose of this is to defer tax, and choose how much is released to me, and when).

 

[daniels27]

But how long can the intermediary hold those funds to qualify as intermediary? You could technically get the money to Gibraltar and then not pay out for a decade until the UK company is bankrupt?