How a US LLC can Uniquely Benefit a UK Resident

A prospective client approached me recently regarding the benefits of establishing a US Limited Liability Company (US LLC), becoming a non-resident of the UK, and in which order should he proceed. Due to the unique status of how the UK interprets US LLC status, residents of the UK can receive some very unique benefits if they neither incur US or UK “effectively connected income”. This was my answer:

Well I first must fully agree with you about non-res status. It can be a real deal changer. However, in your case it is not absolutely necessary, and I would feel free to proceed with a company formation prior to actually leaving the UK.

If you own a US LLC it will be treated very oddly because of the way that the US and the UK deal with how US LLCs are treated for tax purposes.

In the USA the default setting of the US LLC is “disregarded entity” which means it does not exist for US tax purposes. So if you do not live in the USA and you do not earn “effectively connect US source income” then you will owe no US taxes. In fact you will not even have to file tax returns. This will be the case even if you have a US bank account and do all your banking in the USA. Just receiving money in the USA, even if that money comes from US sources, does not create a tax liability. For that you need to do more; make things, store things, deliver things, maintain permanent offices and staff, etc. from inside the USA.

Now that all sounds pretty good! However, it only gets better for citizens of the UK. Even though the US considers the US LLC to be a “disregarded entity” the UK treats the US LLC as a separate entity. If the US LLC does no business in the UK and incurs no income in the UK then there will be no UK taxes due from the income earned by the US LLC. Now you will need to pay taxes on income you receive as a salary or profit distribution, but you will be able to provide yourself with many tax free benefits since the US LLC will have no taxes to pay anywhere. Money you do not distribute to yourself, or use for your personal benefit will be deferred taxation allowing you to further invest that money. Now it is wise to be careful about how you give yourself these “tax free benefits” since the UK may decide that what you are really doing is giving yourself income and then fraudulently evading taxes; not good. So don’t be greedy. If you are receiving real economic benefits while living in the UK then pay taxes on that income. Keep in mind that you get to choose how you get paid and can select the method with the least tax; profit distributions, salary, reimbursement for contract work, etc. You get to choose whatever is best for you, but again don’t be greedy.

This takes us to the interesting issue of how to really avoid UK taxes. Move out of the UK. I am not a UK attorney, and I do not even pretend to play one on TV, but it is my understanding that in order to gain full non-resident status you must do more than just leave the UK and stay out a certain number of days. You must also obtain a legal residency in some other country. In this regard there are a lot of interesting options out there.

I chose the Republic of Georgia for a number of reasons. For me it was mostly lifestyle issues and economic opportunities, but there are also a lot of tax benefits to be had here. Getting a residency is simple and easy, and it can lead to citizenship for some in under a year! I don’t know of any place else on earth where that is possible without some sort of ancestral claim or a huge investment in the country; at least not a country that I would actually want to be part of.

Some other interesting options that provide great tax benefits: Montenegro, Mexico, Malta, Latvia, etc. Each has its advantages and its disadvantages. Note, you do not necessarily have to live in the country that you have a residency. It might just be a legal formality so that you can claim non-res status. On the other hand it might be nice to combine the issue of tax status and where you like to live.

“Disregarded Entity” vs “Taxable Association”: What is the best way to structure your LLC?

For the past 15 years I have been promoting the USA as the ultimate banking solution for non-residents (or as some might say a “Tax Haven” for non-residents). My traditional proposal was to simply set up a US LLC, take the default election of ‘disregarded entity’ (“disregarded entity” is an LLC that is treated by the Internal Revenue Service as a complete pass through entity. For tax purposes it does not exist. For all other purposes it does.), open a bank account, and as long as you are not earning any US Source/Effectively Connected Income, you are fine. No need to file tax returns let alone pay any taxes.

That is no longer entirely the case. FATCA has not changed the tax treatment issues, but has changed the reporting requirements for US payors. The issue of the W-9 (reporting form for US resident payees receiving funds) and W-8Ben (reporting form(s) for non-US residents receiving funds) was always a little murky but now it is downright impossible. Non-residents receiving payments from US payors, even if the funds are “not effectively connected” to US income, are now facing serious problems. No one really understands how the new W-8Ben system works since they have replaced the one form with 4 or 5 related forms that no one really understands how to use. And the penalties for getting it wrong are quite serious so payors are paying a lot more attention, or just choosing not to do business with anyone who cannot execute a W-9.

In short, it has become very difficult for non-residents to use their US bank accounts to receive funds from US payors.

My solutions:

For those non-residents who do not need to receive funds from US payors, the Disregarded LLC is still fine. Nothing to worry about.

For those receiving money from US payors, we need a more sophisticated structure. The US LLC will elect to be a ‘taxable association’ (that is an entity that will be taxed separately like a C Corporation), but it will only act as an agent of a non-resident business (with a written agency agreement) to resell non-resident goods and services in the USA. 90% of the gross income goes to the foreign provider (with appropriate W-8Ben — that will be very easy), and all operating expenses will come out of the 10% agency fee — there should be little or no taxes.

This solution is simple and easy to implement. In fact old Disregarded LLCs can be converted to “Taxable Association” LLCs with little effort. The only downside is that there is now a requirement to file an annual tax return which means there is a requirement to maintain a good set of books so that the tax preparer can accurately file the return. There may be no taxes due, but failure to file a tax return can cause a lot of problems. I have always advised my clients to maintain a set of books for professional reasons, but they were not required for US tax purposes. Now they are.

If you have any further questions please do not hesitate to contact me.

Important Updates to the Privacy Passport®

Nothing ever stays the same, but sometimes things get better. This is the case for the Privacy Passport®. For more information see:

http://www.alexander-hay.com/offshore-financial-planning/the-privacy-passport/

 

 

Why a United Kingdom Limited Partnership?

business_2172838bFor clients who wish to protect their assets, reduce their taxes, and obtain financial privacy using a corporate entity is ideal. One of my favorits is the United Kingdom Limited Partnership (UK LP).

The UK LP is easy to establish, and once established requires zero reporting since it is a truly 100% “pass through” entity. The income from the UK LP is attributed to the partners without the need to file a partnership return in the UK. If the partners are not in the UK and the income is not derived from UK business, there will be no UK taxes and thereby no reports or tax returns that need to be filed. Now since the UK has some of the best tax treaties around, this income may also be tax exempt in your home country.

In addition, as long as you are not “doing business” in the USA (this usually means making, providing, storing and/or transporting goods or services inside the USA), there will be no tax liability in the USA either, although you may end up owing taxes on the profits of the UK LP if you are a citizen or resident of the USA and depending upon how ownership was set-up.

There are many ways of setting up a UK LP depending upon the needs of the client. Let’s chat if you have any questions!

“How Delaware Thrives as a Corporate Tax Haven”

“How Delaware Thrives as a Corporate Tax Haven”

An interesting, if typically biased, article about Delaware companies.

delaware_signI often say that the USA is the greatest tax haven on earth, only you cannot be a US citizen or live here. This is because US laws provide a tremendous degree of legal protection and tax benefits for foreigners who are non-residents. To a lesser degree Delaware does this for the rest of us.

This article describes how Delaware provides an ideal jurisdiction for business formation, but of course throws in the rather unfair characterization that it is all somehow unfair, perhaps even criminal in nature. The article emphasizes the fact that Delaware company formation provides a tremendous degree of privacy, making it very difficult to determine who is the real owner of a Delaware company. The article points out that many criminals have chosen Delaware, arguably because of its privacy. But this characterization is grossly unfair. The privacy that can be obtained by using states likes Delaware is only a small part of why Delaware is such a popular jurisdiction. The fact that a few bad eggs take advantage of this privacy does not make it a bad thing.

The article focuses on tax policy, but implies that somehow the privacy that is obtained by using a Delaware company is the issue. This is simply not true. Privacy and Tax Reduction are two very different things.

There are many valid reasons to choose to incorporate in Delaware. The primary reason why Delaware is so popular is because Delaware has chosen to be a low tax jurisdiction thus attracting businesses. It is also popular because its corporate law is so advanced and secure. Finally, Delaware is very popular because it provides a great haven for legal asset protection planning and it provides financial privacy.

None of these reasons are bad; least of all the financial privacy provided. I am confident that more honest people benefit from such privacy than there are criminals that take advantage of it. If such privacy was taken away, criminals would simply use false names and/or sham owners; after all they are criminals. The privacy provided by Delaware and other states protects the honest who are trying to protect their assets and personal privacy more than it covers for criminal activities. Perhaps the other states should stop complaining about Delaware “robbing them of tax revenue” and instead emulate Delaware and other low tax, business friendly jurisdictions.

What is an LLC? Why should you care?

A limited liability company (LLC) is a hybrid business entity that blends together characteristics of a partnership and a corporate structures. It is incredibly flexible giving limited liability to its Members (the owners) just like a corporation, but offering the ease of management of a partnership.

86527417

It also can offer interesting tax advantages depending upon how you want to use it (but only if properly set-up). It can be set up to be treated as a “disregarded entity” providing “pass through” tax treatment, or it can be set up as a “taxable association” in which case it is taxed like a corporation, but without some of the negative aspects of a corporation. This can often avoid double taxation.

But the most interesting aspect of an LLC is its ability to protect your assets. How can an LLC protect your assets?

The LLC has many special features similar to a partnership that are very beneficial for asset protection:

  • A partial LLC interest, unlike shares in a corporation, cannot be easily seized by creditors. If a Creditor attempts to take your Membership Interest, the creditor will only receive an “assignment” of the interest. The creditor can take away your membership interest, but will not be able to vote in the absence of the unanimous approval of all the other Members.
  • An LLC can require Members to make additional contributions of capital. So if a creditor takes away your Membership Interest, the LLC may require the Creditor to make additional contributions to the LLC. If the Creditor refuses, he may lose his interest in the LLC.
  • If the LLC shows a profit, it is not necessary for the profit to be distributed to the Members but can be retained by the LLC. However, the Members will be taxed on this profit even though they did not receive it. So if a Creditor takes your Membership Interest, the LLC can operate at a profit, and may be able to force the Creditor to pay taxes on profits which the Creditor never received.

A creditor who attempts to take your shares in the LLC will only get an assignment of non-voting shares. The remaining shares will be held by the other members who may be friends, family, or even specially designed trust that will protect your interests. These other Members will be able to vote on who becomes Manager of the LLC, not the creditor that took an assignment of interest.

The other members may choose to appoint you or another friendly person to be the Manager of the LLC. As Manager of the LLC you will be able to decide whether or not you and other employees get a salary, whether or not assets are sold, whether or not profits are distributed, whether or not there is a need for additional contributions from the Members, etc.

In essence, a Creditor who takes your shares in a cleverly designed LLC will not be able to vote or control the company, will not be able to force distribution of assets or profits, may have to pay taxes on income earned by the company even though it never received the profits, and will be vulnerable to demands for additional capital.

As you can see this would be a very unpleasant situation to be in if you were a creditor, but a very good situation to be in if you are trying to protect your assets. Few creditors will want your membership interest in the LLC when they realize what a hornets nest they are getting themselves into.

I have designed a specific system to be able to take advantage of these attributes of an LLC. I call it The Personal Preservation Fortress®. Check it out if you would like to get more information on how to effectively and affordably protect your assets.