Treatment of an US LLC if there's no tax treaty

[gnud]

How's an US LLC treated if its non-US owner resides in a country that doesn't have any tax treaty with the US, and definitely no tax treaty specifying how an US LLC is treated by the local jurisdiction?

Since it's not taxed in the US, and the local jurisdiction doesn't recognize it as a pass-through entity, does it mean it will not be liable for tax anywhere if no draws are made by the owner?

 

[Sols]

It depends on the applicable local law, and whether there is precedence or guidance for‌ how a US LLC should be treated. If there is no specific law, precedence, or‍ guidance from relevant authorities, you're stumbling in the dark.

 

[gnud]

The relevant authorities don't know, I asked them directly.

They know how to handle dividends (exempt⁠ from taxation), but a pass-through entity seems to be alien concept for them.

 

[Sols]

Then you are in the dark, with a couple of options.

You can try to‌ file your income from the US LLC as whatever works best for you personally, and‍ hope for the best. But there's no way to know for sure until it's been⁠ tested.

Another option is to seek some form of predetermination or pre-assessment by the tax⁤ authority. Depends on where you live. Might be something you can do yourself or need⁣ a lawyer to help out with.

To support either option, you can also seek a⁢ written legal opinion from a reputable law firm. This can help you in the future︀ if the tax authority doesn't like what you've done and tries to challenge you.

 

[fshore]

There might be court cases that determine how a US llc should be treated even‌ thought the local staff at the tax office doesn't know the details on this.
Some countries focus on that the llc is a legal body with limited liability and concludes‍ it's a company, which might be tax resident locally. While some countries considers it like⁠ a partnership with pass through income.

 

[Eldorado]

If I were you, I could ask them for any⁢ written statement, even with sentence "we don't know", just to cover yourself in case of︀ any pleasant interview with local tax office.

 

[gnud]

Thanks. Luckily I got the reply by e-mail.⁠

 

[startfleetio]

tax treaty doesn't normally how the LLC will be treated⁢ in the other country. From the US taxation point of view, it is regarded as︀ pass-through. Of course this is assuming you are not engaging and US Trade or Business︁ and has effectively connected income to this USTB. For the home country, it depends, some︂ countries like UK or Canada see them as dividends.

 

[gnud]

Since the authority in charge of⁣ taxation in the home country didn't try to appropriate the profit for taxation, I'd say⁢ it's safe to assume it's not being seen as a pass-through entity here.
If it︀ was they'd eagerly claim it, because for sure this is not the first time someone︁ has an LLC in the US.

So either they never deal with this because they're︂ not supposed to at all - because it's a known thing among accountants / tax︃ advisors so they never submit it for taxation.
Or they know full well it doesn't︄ belong to them, but they just didn't want to reveal it to the public (me),︅ as it's essentially a tax loophole depriving them of tax income.

 

[startfleetio]

Legally speaking, since you are operating the US︁ LLC from your home country, this will trigger the place of effective management rule in︂ most of the countries; you will need to treat this US LLC as a "local"︃ company. Bjt you can argue your managers are outside of the country so the management︄ are not in the country and you are just a shareholder or partner, thus the︅ profits will be either dividends or partnership profits. This is of course if you start︆ drawing the money from the US LLC.

 

[gnud]

no CFC rules in this country

 

[startfleetio]

CFC and POEM are different. CFC is mostly for passive shareholding and POEM is for‌ active management of the company.

 

[gnud]

there's no tax treaty specifying‍ POEM rules between the country and the US

 

[startfleetio]

of course the treaty does not cover POEM nor CFC. CFC and‍ POEM are defined at the tax code of each country

 

[gnud]

it has no‍ CFC rules, and I found no POEM rules either in the tax code

tax treaties⁠ should typically specify tiebreakers but there's none which is just another evidence that there really⁤ are no POEM rules apparently

 

[startfleetio]

that's good news for you. may i know which country?

 

[fshore]

It's normally⁠ called tax residency rules. If you Google corporate tax residency and your country then you'll⁤ find pwc etc guides that shows when a company is considered tax resident in the⁣ country. Almost all countries considers a foreign company tax resident if managed and controlled from⁢ their country.

 

[startfleetio]

Yes, exactly