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Citizens of countries other than the United States are often concerned with the tax consequences of owning an entity such as a limited liability company. A Delaware LLC that (1) carries on no business in the U.S., (2) derives no income from any sources within the U.S. and (3) has not elected to be treated for tax purposes as a corporation does not need to file a U.S. tax return or a Delaware tax return.Under the current IRS "check-the-box" rules, a Delaware LLC that does not affirmatively elect to be treated for tax purposes as a corporation will be treated for federal tax purposes as a partnership. It will be treated as a partnership for Delaware tax purposes as well.Under current Treasury Regulations, a partnership that carries on no business in the U.S. and derives no income from any source within the U.S. does not need to file a tax return. Delaware law currently provides that a partnership need file a return only if it has income from sources within the State of Delaware.If the LLC has only one member, then for federal tax purposes the LLC is disregarded, and the sole member is taxed as a sole proprietor. Current Treasury Regulations provide that a nonresident alien who is not engaged in a U.S. business and who does not derive any income from any source within the U.S. does not have to file a tax return. Similarly, Delaware law currently provides that a nonresident alien having no income from sources within the State of Delaware does not have to file a Delaware return.
If we speak in nutshell, There are important tax and corporate governance advantages to the ownership by non-U.S. persons of a Delaware LLC. These are:
(1) No restrictions on foreign ownership or management of the LLC. Members may be individuals or business entities of any nationality or domicile. Single member LLC's are permitted. . With the exception of a Registered Office and Registered Agent in Delaware, no physical presence is required.(2) The LLC management agreement is not a matter of public record and can be in any language.(3) No disclosure in the public record of the names of the members or managers of the LLC.(4) Non-residents of the U.S. who are members of an LLC and who are not otherwise subject to U.S. federal income taxation pay no tax in the U.S. if the LLC's income is from non-U.S. sources and the LLC carries on no business in the U.S.(5) The LLC's corporate records may be maintained outside of the U.S.(6) The ownership interests in an LLC of an individual non-resident of the U.S. are subject to the U.S. estate tax but can be avoided if the ownership interest is held through a foreign company.
SO, to sum up, if no income is generated from US, or US Sources, you do not file tax returns nor pay any state or federal tax.
In case of any income derived from US, the expenses would deductible and would reduce your taxable income as you rightly say.
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You have not specifically answered any of my questions. :(
I can easily find generic information that you provided online. You have simply copy and pasted from several public sources.
I am looking for specific answers to my specific questions..
Hi and welcome to Just Answer!Different expert here... Please allow me to assist.1. How much Delaware state tax would be payable by the US company?The US company that is a single member LLC is a disregarded entity - it pays NO income taxes and doesn't file income tax return. All income and qualified business expenses are reported on owner's tax return. If there is no physical presence in Delaware and there are no sales to Delaware customers - there is no Delaware income tax liability - and the LLC will only pay flat annual fee. 2. How much US federal tax would be payable by the US company?As mentioned above - the US company that is a single member LLC is a disregarded entity - it pays NO income taxes and doesn't file income tax return. Disregarded - means it is ignored for income tax purposes - as if the LLC doesn't exist. All income and qualified business expenses are reported on owner's tax return. If the owner is a foreign corporation (100% owned by a Hong Kong company) - it files an income tax return as a foreign corporation - form 1120F - www.irs.gov/pub/irs-pdf/f1120f.pdf Tax rate schedule is based on net income from US sources - see instructions, page 24 - Tax Rate Schedule - www.irs.gov/pub/irs-pdf/i1120f.pdf For net income $1,000,000 - income tax would be 113,900 + 34% of the amount over $335,000 = $340,000.All income received by the US LLC will be considered from US sources. If income is received from sources outside the US - the LLC should be registered in those countries according to local laws and in this case will be taxed only on income from US sources.3. Could "transfer pricing" or some other method help reduce the amount of US state and/or federal tax payable? Transfer pricing is NOT a method to reduce tax liability. That is a method to allocate profit between different jurisdictions.Thus if the LLC is doing business in several jurisdictions - for instance in the US and in Hong Kong - the profit is allocated between these countries - so part of it is taxable in the US and part in the Hong Kong. That will allow to report taxable income attributable to the US only - but there would be a tax liability in Hong Kong. There will be tax benefits only if tax rates in Hong Kong are lower compare to the US.
I'm quite happy to pay 5% to 15% corporate tax in the US. Any more than that, and it just isn't worth it... is this possible?
I think you have incorrect impression. Income taxes are due on income. If you or your corporation do not have income - there is no income taxes. But having income and not paying income taxes that is not realistic.
With regard to question #3, can you read the example I provided and respond to it? Essentially, can I reduce the US company's income by deducting the expenses of the secretary and operations manager that is provided by the HK company?
With regard to question #3, can you read the example I provided and respond to it? Essentially, can I reduce the US company's income by deducting the expenses of the secretary and operations manager that is provided by the HK company?Based on your example - the US company which is a single member LLC is a disregarded entity for US income tax purposes. Thus all taxable income (and deductions) are passed to the owner. Also your assumption above is "To keep things simple, we'll say the US company has no expenses. So the $1m revenue = $1m net income"If we disregard that assumption - we definitely need to consider deductible business expenses. Business expenses are the cost of carrying on a trade or business.According to IRS regulations - to be deductible, a business expense must be both ordinary and necessary. An ordinary expense is one that is common and accepted in your trade or business. A necessary expense is one that is helpful and appropriate for your trade or business. An expense does not have to be indispensable to be considered necessary.So if the LLC pays for services (secretarial and operation management) to the HK company - and if that expense both ordinary and necessary - it may be deducted. However because the LLC as a disregarded entity doesn't file income tax return - both income and deductions are reported on owner's income tax return as if there were no any LLC.
If the owner is the NK corporation - it may not deduct "payments to itself" - such "creative accounting" will not hold the audit. That looks as taking the money from one pocket and putting into another pocket...
However if the NK company operates in several countries - the income should be prorated as attributable to each country. There are complex rules how that is done. And rules in the US and HK might be different. Most business are trying to avoid prorations. In particular - the possible purpose of having the US LLC is to separate US operations and not mix with operations outside the US.
OK, thanks. That clarifies things quite a bit.
What if I reversed the ownership of the companies to something like this:
- The US company owns a HK company.
- The HK company owns some intellectual property which is critical to the success of the US company.
- Thus, the US company pays a license fee of $250k per year to the HK company for the right to us the HK company's exclusive IP.
What would be the tax situation with this scenario?
Everything is correct and reasonable.However - let be honest - the purpose of such scheme is to reduce US taxable income. That purpose will be clear identified by the IRS agent in case of the audit. However because the main question would be not your purposes (everyone is trying to reduce the tax liability!) - but if any specific expenses could be deducted - you would be required to proof that such expenses are both ordinary and necessary.If yes - I see no issues.
If you will not be able to convince the IRS agent - the disagreement could be discussed in the Tax Court - and you will be able to convince the Judge that license fee of $250k is common and accepted in your trade or business.