US LLC vs Canadian LLP for a Hungarian tax resident?

[gap]

I think as I'm getting into the topic of tax optimization I'm evaluating my situation‌ here in Hungary, which is not too bad. My case: I can't move for the‍ next 4-5 years, I'm currently self-employed with an annual income of 200k-220k USD and 300k⁠ in savings, I offer consulting services (digital-product design). My current total tax rate is around⁤ 35%. However I would like to attract more serious clients so I would need an⁣ entity with a stronger prestige. I'm thinking about US LLC in WY or Canadian LLP⁢ in BC. Most of my current clients are from the US.

My goal:
Tbh If︀ I can just take the 9% CIT out of the formula I'm good. I will︁ pay myself a salary slightly above the minimum wage so that I would have no︂ other tax-liability for dividends other than the 15% PIT.

The other thing is that I'm︃ currently working on the productization of my service, so I will need a payment processor︄ in the future.

My questions:
- Can I skip the Hungarian 9% CIT or have︅ tax liability here because the actual place of business-management is located in Hungary?
- I︆ know this is not a lot of money but is it worth thinking about asset︇ protection and build a more complex structure?
- Should I keep my sole proprietorship in︈ Hungary?
- Unfortunately I don't have a partner to partner with so this could be︉ a problem with LLP? How about create a US LLC and make it as a︊ partner in my CA LLP (alongside me as an individual)?
- As a US LLC,︋ can I invoice US clients and retain pass-through status?
- What services would you recommend︌ that would make it easy to set up the company?

I'm also open to any︍ other smart ideas that do not involve moving. 🙂

 

[Sols]

As long as you aren't⁢ incorporated or resident somewhere sketchy or high risk, extremely few clients care. TBH, it's sketchier︀ that a Hungarian person living in Hungary is presenting a Canadian company than a Hungarian︁ company.

No. Your foreign company will be subject to Hungarian corporate tax rules. Then it's︄ just a matter of whether Hungary recognizes your chosen entity as a pass-through entity, i.e.︅ is your US LLC/CA LLP a Kft or Kkt/Bt?

Asset protection from whom? Under what circumstances?︈ What kind of assets?

Yes, because forming a foreign company is only going to make things︊ worse for you.

Yes, you can have another company as a partner and you can be︍ the sole owner of that other company. Of course, banks might think this is a︎ little strange when you try to open bank accounts for the LLC or LLP.

Yes.

Consider changing nothing. Don't mess this up. At‍ 220,000 USD/year in income, you are high enough in the income/wealth bracket in Hungary that⁠ you're more likely than the average person to be investigated if the tax office catches⁤ wind of anything.

If you are a Hungarian citizen, even leaving Hungary doesn't change your⁣ personal tax situation. Hungary taxes its citizens even after they leave Hungary.

 

[Marzio]

Unless he becomes tax resident in a country with a DTT with HU.

 

[gap]

Sorry but⁠ I'm confused, if the US LLC is a pass-through entity then its income will be⁤ included in my personal tax return, right? 15% personal income tax and 13% social contribution⁣ tax, no 9% CIT.
Or I can do anything as long as I live here⁢ I have to pay corporate tax at the company level because the tax authorities treat︀ my "entities" as KFTs?

 

[Sols]

A US LLC is⁣ a pass-through in the US. What does Hungarian law say about it? For example,⁢ in Canada, US LLCs are not considered pass-through entities. If you live in Canada and︀ operate a US LLC, the LLC has to pay corporate income tax in Canada.

Some countries accept US LLCs as pass-through, some consider them taxable entities, and many haven't had︁ a reason to make a decision yet, making it uncertain what would happen.

 

[gap]

I understand what you're saying but unfortunately I have to‍ do something because from 2024 there will be no double taxation treaty between Hungary and⁠ the US, I think this will affect my current operations 90% of my clients are⁤ from the US. But I'm not sure, maybe as a sole proprietor it doesn't affect⁣ me. I will talk to a tax advisor, but do you know anything about this?⁢

 

[JustAnotherNomad]

If you have US clients, you risk US taxes with a US LLC. It might‌ be better to use a non-US company. But like @Sols said, you'd have to check‍ how Hungary treats such a setup.
Do you need all that money? Why don't you⁠ pay the 9% CIT and keep the money in the company? You'd only pay tax⁤ on what you pay out. And paying dividends instead of a salary (or a mix⁣ of both) might lower your taxes, too. I'd start by talking to a Hungarian tax⁢ advisor. I'm sure there are ways to lower your tax rate.
Then you could consider︀ adding something like a Canadian LP - but why? Hungary has good reputation, it's where︁ you're located, what's the problem?

 

[Sols]

How are you currently benefitting from the tax treaty?

Generally speaking, I don't see how⁢ the absence of a double taxation treaty would adversely affect your situation where you invoice︀ US clients as a Hungarian sole proprietor or as a Hungarian company.

Adding a US︁ LLC just seems like an unnecessary complication with no benefits.