US DISREGARDED LLC - PASSTHROUGH QUESTION

[Tetiana]

A non-qualified intermediary is a non U.S. financial institution that hasn't entereted into an agreement with the IRS.

Is your GIB company a financial institution? Probably not.

https://tax.thomsonreuters.com/blog...-intermediary-and-non-qualified-intermediary/

 

[daniels27]

A non-qualified intermediary is a non U.S. financial institution that hasn't entereted into an agreement with the IRS.

Is your GIB company a financial institution? Probably not.

https://tax.thomsonreuters.com/blog...-intermediary-and-non-qualified-intermediary/

That's what he wants to build. Again, unless we are talking about millions, he better pay the UK taxes.

 

[SmartestSmarty]

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?

From what I read a qualified intermediary is a financial institution and non-qualified intermediary is not.
An intermediary can be an agent, which is not a financial institution.

After speaking with an accountant in the US, he said I can use a disregarded LLC incorporated in the USA to receive the funds, and then distribute those funds from the LLC bank account to my personal one. This essentially controls the timing of when the funds are received for tax purposes. It might be my best option.

 

[Forester]

After speaking with an accountant in the US, he said I can use a disregarded LLC incorporated in the USA to receive the funds, and then distribute those funds from the LLC bank account to my personal one. This essentially controls the timing of when the funds are received for tax purposes. It might be my best option.

Well, I'd recommend to ask for a second and third opinion; the second from a US tax advisor or a lawyer (not an accountant) – AFAIK, any income earned by a pass-through LLC is considered personal income for the members of the LLC under the US law, so it should be immediately taxed regardless of where the money are held (but it's under the US law); the third from a UK tax advisor, to hear how the UK law (and HMRC ) look at this.
I think you should consider to engage another company as a LLC holder / as an intermediary, as discussed e.g. here US DISREGARDED LLC - PASSTHROUGH QUESTION
Of course, the costs of such a setup are of a serious concern...

 

[Tetiana]

it should be immediately taxed regardless of where the money are held

This is not the case in UK as HMRC sees US LLC as opaque entity so essentially you are taxed at the moment you distribute income from US LLC to yourself.

I'm not familiar with UK CFC rules though.

 

[Don]

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).

Well, I'd recommend to ask for a second and third opinion; the second from a US tax advisor or a lawyer (not an accountant) – AFAIK, any income earned by a pass-through LLC is considered personal income for the members of the LLC under the US law, so it should be immediately taxed regardless of where the money are held (but it's under the US law); the third from a UK tax advisor, to hear how the UK law (and HMRC ) look at this.
I think you should consider to engage another company as a LLC holder / as an intermediary, as discussed e.g. here US DISREGARDED LLC - PASSTHROUGH QUESTION
Of course, the costs of such a setup are of a serious concern...

US LLC ownership interest can also be held in a (foreign) trust, which can be cheaper and simpler than setting up a separate legal entity.

Using a trust can offer various benefits depending on how you set up the trust, incl.:

• Probate avoidance at death
• Incapacity planning while living
• Privacy
• Asset protection

 

[SmartestSmarty]

This is not the case in UK as HMRC sees US LLC as opaque entity so essentially you are taxed at the moment you distribute income from US LLC to yourself.

I'm not familiar with UK CFC rules though.

That is what I was told, I think the accountant is also an international tax specialist especially in single member foreign owned LLCs.

So if this is the case, then this would be a decent solution.

US LLC ownership interest can also be held in a (foreign) trust, which can be cheaper and simpler than setting up a separate legal entity.

Using a trust can offer various benefits depending on how you set up the trust, incl.:

• Probate avoidance at death
• Incapacity planning while living
• Privacy
• Asset protection

Yes I think a trust (is essentially a form of intermediary) I was considering this as an option, but I don’t really want to give the control to someone else. Unless I could set the trust up with a trustee that I know.

 

[Don]

Yes I think a trust (is essentially a form of intermediary) I was considering this as an option, but I don’t really want to give the control to someone else. Unless I could set the trust up with a trustee that I know.

It might not be required to appoint someone else as a trustee.

A trustee can also be a beneficiary of a trust.

It’s fairly common for a trust beneficiary to also serve as a trustee. For example, in a family trust created by two spouses, the surviving spouse will almost always serve as both a trustee and beneficiary. It’s also common practice for one adult child to serve as the trustee of a trust after the parents pass, even if there are other kids.

 

[SmartestSmarty]

It might not be required to appoint someone else as a trustee.

A trustee can also be a beneficiary of a trust.

It’s fairly common for a trust beneficiary to also serve as a trustee. For example, in a family trust created by two spouses, the surviving spouse will almost always serve as both a trustee and beneficiary. It’s also common practice for one adult child to serve as the trustee of a trust after the parents pass, even if there are other kids.

This sounds like an option to look in to. Thanks. Any suggestions on jurisdictions or a good place to begin my search?

 

[Forester]

This is not the case in UK as HMRC sees US LLC as opaque entity so essentially you are taxed at the moment you distribute income from US LLC to yourself.

Oh well. Thanks for the clarification.

I'm not familiar with UK CFC rules though.

Good point, and a very important one in this case.

I think the accountant is also an international tax specialist especially in single member foreign owned LLCs.

UK CFC rules included?

If so, then the problem seems to be solved

Yes I think a trust (is essentially a form of intermediary) I was considering this as an option, but I don’t really want to give the control to someone else.

As @Don has pointed above, a trust brings some more benefits but of course, at some price, as always.

Unless I could set the trust up with a trustee that I know.

This is essential in any case.

 

[SmartestSmarty]

UK CFC rules included?

If so, then the problem seems to be solved

Well this is the first time I have heard about them, so this was not something I had discussed.

It seems that the CFC rules are for bringing a foreign owned entity in to chargeable gains in the UK, but these gains are to be charged in the UK anyway.
The only thing that is controlled is the timing, but in any case, the distributions will be taxed in the UK.

I am not sure if there is something I am missing, and why this would be an issue?

US LLC ownership interest can also be held in a (foreign) trust, which can be cheaper and simpler than setting up a separate legal entity.

I thought trusts were expensive to set up. I didn't know they were cheaper than setting up a company. Can you please provide some examples of places that will set up a low cost trust?

 

[Forester]

Well this is the first time I have heard about them, so this was not something I had discussed.

Recommendable

It seems that the CFC rules are for bringing a foreign owned entity in to chargeable gains in the UK, but these gains are to be charged in the UK anyway.
The only thing that is controlled is the timing, but in any case, the distributions will be taxed in the UK.

I am not sure if there is something I am missing, and why this would be an issue?

Exactly because of the timing. I can be possible (I have no clue!) that a foreign entity controlled from the UK is to pay dime to HMRC just after making profit, no tax deferral being possible...

 

[SmartestSmarty]

Exactly because of the timing. I can be possible (I have no clue!) that a foreign entity controlled from the UK is to pay dime to HMRC just after making profit, no tax deferral being possible...

I see, thanks for mentioning it. I’ll seek advice.

 

[Tetiana]

these gains are to be charged in the UK anyway.

Especially with passive income is easy to trigger CFC rules.

Imagine your US LLC receives $1 million in royalties but you only distribute $100K to yourself on which you'll pay your taxes.

What about the remaining $900K?

Since UK sees US LLC as opaque those 900K should be taxed in UK only when you'll decide to cash them out but what if in the meantime you'll decide to move to UAE?

UK will lose all those taxes.

CFC rules are there to prevent exactly that behaviour and if triggered all the amount will be taxed at personal income tax rate.

 

[Don]

I thought trusts were expensive to set up. I didn't know they were cheaper than setting up a company. Can you please provide some examples of places that will set up a low cost trust?

It depends on the counterparties, but the UK, for instance, is quite a flexible jurisdiction for trusts. After all, this is where the modern trust originated from.