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]

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

 

[SmartestSmarty]

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 personal︀ one. This essentially controls the timing of when the funds are received for tax purposes.︁ It might be my best option.

 

[Forester]

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 the︀ LLC under the US law, so it should be immediately taxed regardless of where the︁ money are held (but it's under the US law); the third from a UK tax︂ advisor, to hear how the UK law (and HMRC 😉 ) look at this.
I think︃ 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 of︅ such a setup are of a serious concern...

 

[Tetiana]

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]

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 a︋ 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]

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.

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

 

[Don]

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 and︀ beneficiary. It’s also common practice for one adult child to serve as the trustee of︁ a trust after the parents pass, even if there are other kids.

 

[SmartestSmarty]

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

 

[Forester]

Oh well. Thanks for the clarification.

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

UK CFC rules⁣ included?

If so, then the problem seems to be solved 😉

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

This is essential in any case.

 

[SmartestSmarty]

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?

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

 

[Forester]

Recommendable 😉

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

 

[SmartestSmarty]

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

 

[Tetiana]

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 all︀ the amount will be taxed at personal income tax rate.

 

[Don]

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.