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Lev
Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22655
Experience:  Taxes, Immigration, Labor Relations
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Hello, I am looking at setting up a Delaware LLC in order

Resolved Question:

Hello,
I am looking at setting up a Delaware LLC in order to do international trades of goods. The LLC would buy goods from Asia (produced and shipped from) and sell them directly to a European/French company who will then distribute them locally (no sale to the US/Delaware).

The goods would not transit via the US and the 2 partners are non US alien residents leaving in Europe (France and UK to be accurate).
The company would not have any office in the US/Delaware except a Virtual Office with US address and US Telephone/Fax number.

- Could you please let me know if it qualifies for foreign income and hence no Income Tax in US?
- What is the difference please between Registered Address and Trading Address?
- Do I need to use a Trading Address outside US? Do I need to set up also a virtual office outside the US? Does the address could be anything?
- Do the invoices have to be thus sent to the Trading Address outside US to qualify for foreign income or could they be sent to the Registered Address?

Many thanks for your help.

Best regards,
Ludovic
Submitted: 11 months ago.
Category: Tax
Expert:  Lev replied 11 months ago.

Lev :

Hi and welcome to Just Answer!
First of all - yes - that will be income from foreign sources - however - that doesn't necessary means - such income is excluded from US income tax liability.
While generally income from foreign sources is not taxable fro nonresident aliens - in your situation - a LLC with several members would be classified as a partnership for income tax purposes - and because the LLC is registered in the US - that will be an US partnership.

Lev :

What is the difference please between Registered Address and Trading Address?
Registered Address is the address fro mailing correspondence and Trading Address is the address where business activities are performed.
Do I need to use a Trading Address outside US?
There is no limitation - as long as business activities are performed at any specific location - that is your Trading Address - it may be in the US or outside the US. You may have several such locations.
Do I need to set up also a virtual office outside the US?
Again - that is based on your business needs - you may have or not have a virtual office. Because that is "virtual" office - not physical office - generally - it doesn't affect determination of the income source.
Does the address could be anything?
Yes - the address normally points to a physical location - and that location usually used to determine the source of income for federal and state tax purposes.

Lev :

Do the invoices have to be thus sent to the Trading Address outside US to qualify for foreign income or could they be sent to the Registered Address?
There is no such requirements... You may use any address on your invoices. However if the address is clear indicates to the location outside the US - that might help to proof of income sourcing in case of audit or disagreement.

Customer:

Hi Lev

Customer:

Many thanks for your answer concerning the Foreign Income definition

Customer:

however, your answer concerning the Partnership is now raising some more question for me tax wise.

Lev :

your answer concerning the Partnership is now raising some more question for me tax wise.
As a partnership - the LLC is not liable for income taxes - and such liability is passed through to partners.
The issue with your LLC as a legal entity is that it is a partnership for income tax purposes - and that is a US partnership. Thus - all income is considered as from US sources and taxable in the US - unless you specifically proof differently.
For instance - because the LLC has members in France and UK - and assuming the LLC has business activities in these countries - it might be registered in these countries - and income would be allocated as earned in the US, in France and UK. In this case - taxes paid abroad would be credited - and there will not be double taxation.

Lev :

Please be aware that situation would be very different if that is a single member LLC.

Lev :

Please be aware that situation would be very different if that is a single member LLC.
An LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.
That means - the LLC doesn't file its own income tax return - but all income and expenses are reported on owner's individual tax return. Disregarded - means - it is ignored as a separate taxing entity - and all income and deductions are reported on owner's individual tax return.
If you are a nonresident alien - you are taxed ONLY on income from US sources. Thus - if you do not have any income from US sources - there is no tax liability - and you are not required to file US federal tax return. Your tax liability in your home country or your country of residence - is a separate issue - and is based on local laws.

Lev :

Many thanks for your answer concerning the Foreign Income definition.
There are some complex rules to determine the source of income. You may take a look - page 12 of IRS publication 519 - http://www.irs.gov/pub/irs-pdf/p519.pdf - Table 2-1. Summary of Source Rules for Income of Nonresident Aliens.

Customer:

Correct me please if I am wrong.
If I understand well, because it is a partnership, the income tax the LLC would normally not pay if single member, would be here transferred to partners for their own personal income tax in the US.
However, France and UK have signed double taxation treaty, it would mean if we are respectively French and UK resident that we would have to declare such US income in our local tax filling. We wouldnt pay anything to US but we would pay them in France/UK. Correct?

Lev :

If I understand well, because it is a partnership, the income tax the LLC would normally not pay if single member, would be here transferred to partners for their own personal income tax in the US.
A Limited Liability Company (LLC) is a business structure allowed by state statute. Each state may use different regulations. Most states also permit “single-member” LLCs, those having only one owner.
Depending on elections made by the LLC and the number of members, the IRS will treat an LLC as either a corporation, partnership, or as part of the LLC’s owner’s tax return (a “disregarded entity”). Specifically, a domestic LLC with at least two members is classified as a partnership for federal income tax purposes unless it files Form 8832 and affirmatively elects to be treated as a corporation. And an LLC with only one member is treated as an entity disregarded as separate from its owner for income tax purposes (but as a separate entity for purposes of employment tax and certain excise taxes), unless it files Form 8832 and affirmatively elects to be treated as a corporation.

Lev :

So - fro federal tax treatment - we have either a partnership or a “disregarded entity.”
In case of the partnership - income tax return is required - but all tax liability is passed to partners.
In case of a “disregarded entity” - the entity is ignored for income tax purposes - - and income tax liability is determined for the business owner as the LLC is not exist.

Lev :

Tax treaties is a very complex instrument. They usually regulate some conflicting clauses of tax law of contracting countries. That doesn't mean you wouldn't pay anything to US - but that means - you will not pay double taxes on the same income.

Customer:

mmh I see many thanks for this clarification.

Does it mean one of the solutions would be to have a single member LLC for each partners and then both LLC's holding shares of LLC effectively doing the business or it will be still seen as a partnership if shares are held by 2 different entities? does such scheme would be authorised?

Lev :

Generally - there is no shares in the LLC unless you specifically choose the LLC to be taxed as a corporation. Members hold partnership interest. However - regardless who are members - physical persons or other LLCs - that will be an US partnership - and all income regardless of its source will generally be taxable for in the US.
As such - income will be passed to partners.

Customer:

It definitely complicates the exercice to be classified as partners for LLC...

For single member LLC, could you please confirm whether no tax liability is passed on to the owner and no tax report has to be filed by both the company and the owner (if all incomes are foreign incomes)?

Lev :

A single member LLC is disregarded entity - means - ignored - as it doesn't exist - and all business activities and transactions are treated as performed by the member as if there were no LLC.
So - in this case to determine if such income is taxable or not in the US - we need to start with who is the member and what type of income has been received.
As in your situation - the member would be a nonresident alien - and income is from sources outside the US - such income is not taxable in the US. Nonresident aliens are generally taxed ONLY on income from US sources.

Customer:

Many thanks for all these precisions Lev! Very helpfull and detailed.

Lev :

You are welcome.

Customer:

Best regards

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22655
Experience: Taxes, Immigration, Labor Relations
Lev and 7 other Tax Specialists are ready to help you
Expert:  Lev replied 11 months ago.
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Customer: replied 11 months ago.

Hi Lev,


I come back to you today following the conversation we had above yesterday.

Could you please help me on getting a clearer view on Delaware LLC taxation.


 


 


1/ single member Delaware LLC - sole US nonresident alien - only foreign income (buying from Asia and selling to Europe - no US presence)


 


Could you please confirm:


- the LLC would not need to prepare and file tax returns?


- the owner would not need to file any personal US income tax report?


- the owner would not pay tax in the US?


- does this income has to be filed in his country of residence (France or UK)?


- would that income be taxed? if yes, according to local laws and rates?


 


 


For a two members Delaware LLC - both US nonresident aliens - only foreign income (buying from Asia and selling to Europe - no US presence)


 


Could you please confirm the only difference would be:


- IRS would treat the LLC as a US Partnership?


- LLC would need to file IRS form but would not pay any tax? Income would be transfert (prorata of ownership) to owners like for single member LLC?


- owners would not pay tax in the US as only foreign income?


 


 


Many thanks,


Ludovic

Expert:  Lev replied 11 months ago.

Hi Ludovic and welcome back!
Please see my comments in line.
1/ single member Delaware LLC - sole US nonresident alien - only foreign income (buying from Asia and selling to Europe - no US presence)
Could you please confirm:
- the LLC would not need to prepare and file tax returns?
In this case - a single member LLC is disregarded entity for income tax purposes - means - ignored - as it doesn't exist - and all business activities and transactions are treated as performed by the member as if there were no LLC.
It is still a separate legal entity - it may own assets, have a bank account - but it is ignored for income tax purposes. Thus - you are correct - the LLC doesn't file US income tax returns.

- the owner would not need to file any personal US income tax report?
In your situation - the owner is a nonresident alien - and because nonresident aliens are taxed only on income from US sources - and because there is NO income from US sources - - you are correct - the owner is not required to file US income tax returns.

- the owner would not pay tax in the US?
That is correct - because none of income is from US sources - none is taxable for nonresident aliens - and no US income tax liability.

- does this income has to be filed in his country of residence (France or UK)?
Generally - yes - however filing requirements are regulated by local laws. Usually - there is a threshold - if the income is above certain level - the income tax return is required.

- would that income be taxed? if yes, according to local laws and rates?
Yes - residents of France and UK are taxed on all worldwide income.
Business income is added to other taxable income and taxed based on total income, filing status, dependents, and other factors specified in the tax return.

For a two members Delaware LLC - both US nonresident aliens - only foreign income (buying from Asia and selling to Europe - no US presence)
Could you please confirm the only difference would be:
- IRS would treat the LLC as a US Partnership?
That is correct - unless you specifically choose the LLC to be treated as a corporation - under default rules - in the US it will be treated as a partnership for federal income tax purposes.

- LLC would need to file IRS form but would not pay any tax? Income would be transfert (prorata of ownership) to owners like for single member LLC?
A partnership is the relationship existing between two or more persons who join to carry on a trade or business. Each person contributes money, property, labor or skill, and expects to share in the profits and losses of the business.
A partnership must file an annual information return to report the income, deductions, gains, losses, etc., from its operations, but it does not pay income tax. Instead, it "passes through" any profits or losses to its partners. Each partner includes his or her share of the partnership's income or loss on his or her tax return.

- owners would not pay tax in the US as only foreign income?
Income passed to a partner from the US partnership is TAXABLE for US income tax purposes - regardless if that income from foreign sources. Will or will not partners pay any income taxes determined by filing US income tax returns.

Lev, Tax Advisor
Category: Tax
Satisfied Customers: 22655
Experience: Taxes, Immigration, Labor Relations
Lev and 7 other Tax Specialists are ready to help you

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