USA LLC owned by European resident = VAT or no ?

[TheCryptoAnt]

How?

Cause its Spain, their IRS is sloppy at best

 

[lifeisfun]

Here are so many missinformations..

He elected to have LLC taxed as C-Corp. What means that this LLC is not considered tax transparent any more. It is taxed as standard corporation.
Based on DTT between USA and Spain, taxation of this company is as follows:
All profits which source is in Spain, is taxed in Spain. All other profits are taxed in the USA by a standard CT rate applicable for corporations.
After corporate taxation, when dividends are paid, US withholding tax has to be witheld once dividends are paid in a rate set by a DTT. (15 %)

When speaking about VAT, you have to register US LLC for VAT in EU if total value of services provided to the customer in any of EU countries reaches limit set for that country. Limits are set in12-months basis. The most countries has set limit somewhere between 30K and 100K Eur in any 12 months period.

 

[marioIT]

I mean just give a read to the 2013 US-Spain treaty update and its 2014 technical explaination... it explains it all.

https://home.treasury.gov/system/files/131/Treaty-Spain-Protocol-1-14-2013.pdf
https://home.treasury.gov/system/files/131/Treaty-Spain-Protocol-TE-6-19-2014.pdf
It was made exactly cause people were abusing company residence and dtt (dividends...). It integrates the place of management and control and also clarifies some hybrid situations.

 

[JustAnotherNomad]

He elected to have LLC taxed as C-Corp. What means that this LLC is not considered tax transparent any more. It is taxed as standard corporation.

Yes, we've already established that.

Based on DTT between USA and Spain, taxation of this company is as follows:
All profits which source is in Spain, is taxed in Spain. All other profits are taxed in the USA by a standard CT rate applicable for corporations.

No, the company would be tax resident in Spain due to management and control in Spain, and article 4 of the tax treaty would confirm that.
So it would be the other way around: US-sourced profits would be taxable in the US, all other profits would be taxable in Spain. Even payments from US clients would likely count as Spanish-sourced due to a lack of economic substance in the US.

When speaking about VAT, you have to register US LLC for VAT in EU if total value of services provided to the customer in any of EU countries reaches limit set for that country. Limits are set in12-months basis. The most countries has set limit somewhere between 30K and 100K Eur in any 12 months period.

Spanish companies have to register for VAT immediately, before any economic activity. This would likely also apply to a US-registered company that is tax resident in Spain.

I think it's clear by now that this stuff isn't exactly straightforward, so OP really needs very experienced advisors in both countries to make it work.
I agree that the best option may be to set up a new US LLC that would be taxed as a disregarded entity if he really wants to keep using a US entity.

 

[tomboy]

Maintaining my business in the U.S presents numerous advantages, like preserving my residence privacy, additionally, I find the Delaware legislation to be highly beneficial for companies registered there in case of problem in a commercial relationship.

Tomorrow, I plan to contact my CPA in the U.S to inquire about the possibility of switching back the company's tax classification from C-corp to disregarded entity, effective from 2024.

Additionally, I will explore the process of registering the LLC for VAT in Spain.

When all of this is done, I believe I will be fine...

I've been contemplating another idea that I'd like your thoughts on.

As I understand it, I will be registering as an "autonomo" here in Spain and as such, I will obtain a VAT number. Given the transparent nature of my U.S. LLC in the eyes of Spanish tax authorities, it crossed my mind that perhaps I could utilize my Spanish VAT number for my U.S. LLC as well.

Do you think this approach could be feasible?

 

[fshore]

As I understand it, I will be registering as an "autonomo" here in Spain and as such, I will obtain a VAT number. Given the transparent nature of my U.S. LLC in the eyes of Spanish tax authorities, it crossed my mind that perhaps I could utilize my Spanish VAT number for my U.S. LLC as well.

Do you think this approach could be feasible?

Not sure how the Spanish tax office would view that, I wouldn't think that could work. But in any case you could get problem with your customers, if they check your invoices and see that the vat number is registered to another name.

 

[lifeisfun]

Yes, we've already established that.



No, the company would be tax resident in Spain due to management and control in Spain, and article 4 of the tax treaty would confirm that.
So it would be the other way around: US-sourced profits would be taxable in the US, all other profits would be taxable in Spain. Even payments from US clients would likely count as Spanish-sourced due to a lack of economic substance in the US.



Spanish companies have to register for VAT immediately, before any economic activity. This would likely also apply to a US-registered company that is tax resident in Spain.

I think it's clear by now that this stuff isn't exactly straightforward, so OP really needs very experienced advisors in both countries to make it work.
I agree that the best option may be to set up a new US LLC that would be taxed as a disregarded entity if he really wants to keep using a US entity.

DTT says that company in considered to be tax resident in a country of registration. And that if there exists PE based on a local law, profit which is attributable to this PE will be taxed on a local sourced profit there scheme.
So company will be taxed in Spain just in spanish source profit. The rest will be taxes in the USA.

 

[JustAnotherNomad]

Where does it say that? The DTT I found said the tax authorities would decide in mutual agreement.
Anyway, he is based in Spain, if it's only him, then probably 100% of the revenue would be attributable to the Spanish PE anyway, so the distinction likely wouldn't matter.
E.g. if he visits a customer in France for a month and works from the customer's office, then it would likely still be attributable to the Spanish PE.

 

[tomboy]

Not sure how the Spanish tax office would view that, I wouldn't think that could work. But in any case you could get problem with your customers, if they check your invoices and see that the vat number is registered to another name.

got you, makes sense. thx

Where does it say that? The DTT I found said the tax authorities would decide in mutual agreement.
Anyway, he is based in Spain, if it's only him, then probably 100% of the revenue would be attributable to the Spanish PE anyway, so the distinction likely wouldn't matter.
E.g. if he visits a customer in France for a month and works from the customer's office, then it would likely still be attributable to the Spanish PE.

Exactly, all the work will be done from Spain, so it will be taxed in Spain.

 

[tomboy]

Hi all - just wanted to provide a small update:

I've invested significant time and resources consulting with legal and accounting professionals. The prevailing recommendation has been to establish a standard S.L. in Spain and explore the potential benefits of the Beckham Law and/or the new start-up law. My primary takeaway is that finding a professional who truly grasped the specificities of my situation was/is challenging. It hasn't been straightforward and I remain skeptical up until now.

Shutting down my U.S. business isn't a simple decision. It represents years of dedication, from client acquisition and website development to branding efforts, banking logistics, and establishing a corporate identity. Discontinuing such an endeavor isn't something I'm inclined to do lightly.

Currently, I'm leaning towards initiating a Spanish S.L. specifically for European clients. This strategy would streamline VAT considerations. For clients outside Europe, my U.S. entity would remain the primary point of contact as I would change the tax classification back to regular LLC.

From my research and discussions, it's clear that Spain views U.S. LLCs as transparent entities, meaning that all income would be subject to personal income tax in Spain. One recurring concern shared by some professionals is that declaring ownership of a U.S. LLC might attract increased scrutiny from Hacienda, which, even if I'm entirely compliant, could result in additional costs and work.

Interestingly, as I own two different citizenship (outside of Spain) and valid proof of addresses in both countries where I have a passport, some CPA's suggested not declaring the U.S. company in Spain. It's somewhat unconventional for a CPA to advise against declaring assets, which further underscores the complexity of the situation.

All in all, while I've garnered a better understanding, I'm still contemplating the best course of action.

 

[12345]

Can you share what did you find out?
Can you use USA LLC disregarded entity and declare your income in the personal tax return in Spain, is it 100% legal to do it that way? Or you need to register a spanish branch of your USA LLC and follow the spanish accounting and auditing obligations?

On the USA side:
With no Permanent Establishment in the USA and Delaware LLC taxed as disregarded entity you are not required to fill out any forms or do any accounting. You need to pay the yearly franchise tax of $300 which is due June 1st and that's it

If you have any doubts I recommend reading Double Taxation Avoidance Agreement
--------------------------------------------------
The term "permanent establishment" includes especially:
a) a place ofmanagement;
b) a branch;
c) an office;
d) a factory;
e) a workshop; and
t) a mine, an oil or gas well, a quarry, or any other place of extraction of natural
resources.
--------------------------------------------------

 

[tomboy]

Can you share what did you find out?
Can you use USA LLC disregarded entity and declare your income in the personal tax return in Spain, is it 100% legal to do it that way? Or you need to register a spanish branch of your USA LLC and follow the spanish accounting and auditing obligations?

On the USA side:
With no Permanent Establishment in the USA and Delaware LLC taxed as disregarded entity you are not required to fill out any forms or do any accounting. You need to pay the yearly franchise tax of $300 which is due June 1st and that's it

If you have any doubts I recommend reading Double Taxation Avoidance Agreement
--------------------------------------------------
The term "permanent establishment" includes especially:
a) a place ofmanagement;
b) a branch;
c) an office;
d) a factory;
e) a workshop; and
t) a mine, an oil or gas well, a quarry, or any other place of extraction of natural
resources.
--------------------------------------------------

Absolutely, a Spanish resident can legally own a USA LLC, irrespective of the state in which it's registered, provided both U.S. and Spanish laws are adhered to. There's no obligation to establish a Spanish branch for your U.S. LLC.

Regarding the U.S. aspect: You're on point. While there's no mandatory accounting requirement, it's highly advisable to maintain comprehensive records – not just for non-residents, but for U.S. residents as well. In Spain, if faced with an audit, you'll be asked for documentary evidence supporting all transactions. Therefore, even if accounting isn't obligatory in the U.S., it becomes virtually essential for clarity and compliance from the Spanish perspective.

Let's illustrate with a few examples:

Phone Bill Deductions: In the U.S., it's common practice to write off 100% of your phone bill as a business expense, even if it's a device you use for personal matters. In Spain, the approach is more conservative. Only 50% of the bill can be written off since it's assumed that the phone is used for personal purposes half the time. Now, if you fully deduct your phone bill under your U.S. LLC and subsequently face a Spanish audit, Hacienda will only acknowledge 50% of that deduction.

In essence, while you can certainly retain ownership of the USA LLC, you should be cautious and apply Spanish regulations and norms where necessary, especially when it concerns potential deductions.