The model of the Limited Liability Company (LLC) is relatively new and is possibly one of the most interesting developments in international corporate and trust work in recent years.
An LLC has corporate form and nature but is considered as a partnership under the Internal Revenue Code of the USA. As such, the LLC is not separately taxable but rather its income is taken to flow through to its members who are taxed according to US codes as though they had received the income directly. Non US persons are only taxed on US source income or income connected with the conduct of a US trade or business. If the LLC earns any income which falls outside this definition and the members of the LLC are non US persons with no US presence then no tax would be payable either by the LLC or by its members.
Therefore, a non taxable structure can be created by having non US individuals or companies as the members of the LLC. If the LLC had individual members, those members would most probably suffer taxation on profits received from the LLC in their country of residence, so the suggested structure is to have two offshore companies as the members of the LLC.
The US has signed taxation agreements with most developed countries. The effect of these taxation treaties is to significantly reduce the level of tax which must be pending on the payment of royalties, dividends and interest to a US individual or corporation.
The LLC is a relatively new product so there is little precedent available which gives support in determining the exact treatment of an LLC by non US countries in relation to the taxation treaties. Thus, although it would appear as though an LLC may be extremely useful in any tax planning exercise, it’s recommend that carefulness be exercised and that a suitable legal opinion is sought.
What is clear is that the US LLC is a low profile no tax company which enjoys the protection and privileges afforded by the US legal system.
It is possible to incorporate an LLC in most US States but considering the details above Delaware is the ideal domicile.
A Delaware LLC has the following characteristics:
- Members
An LLC is required to have only one member but it is assumed that tax free status will only be applicable to LLC’s which have two or more members. Members are comparable to shareholders in a normal corporation but hold “units” rather than shares. The details of the incorporating members appear on the public file but their anonymity will be retained if members would be TCI or other offshore companies. Changes in members do not have to be reported.
- Directors
As the directors’ details can be kept confidential and need not be registered on the public file, many applicants prefer to put their own names as directors. Though, during the course of the business operations of the company there will typically be many documents which require signing by a director so they will lose their anonymity and confidentiality upon signing.
Additionally, most onshore countries have provisions within their tax legislation whereby any company, no matter where it is incorporated, which is managed or controlled from within their jurisdiction can be considered tax resident and taxable on worldwide income at local rates. Thus, for example, any offshore company which had UK based directors would be considered by the UK Inland Revenue as being tax resident in the UK and subject to UK tax on its worldwide income. Most other onshore countries have similar provisions within their tax legislation. So, to guarantee that confidentiality can be retained and in order to help refute any suggestion that the company may be tax resident in the home country of the promoters or any other onshore jurisdiction, applicants may care to ask company services providers to give professional third party directors who are resident in a fiscally neutral location.
- Managers
It is normal for one or more managers to be appointed whose responsibilities and functions would be similar to the directors of a standard company. Alternatively, the members themselves may choose to carry out the administration of the company themselves in a similar manner in which the partners of a partnership conduct their activities. Details of the managers do not appear on the public file.
- Annual Reporting
A simple franchise tax report must be completed each year but this does not give any details about the structure of the LLC. Provided the LLC conducts no US business and receives no US source income neither the LLC nor its foreign members would be required to file US tax returns.
- Taxation
A properly structured Delaware LLC which has no US source income or income effectually related to the conduct of a US trade or business would not be subject to any form of US tax on income
- Restriction on Name and Activity
The name must end with the words “Limited Liability Company” or “LLC”. The following words, and associated activities, cannot be used – Bank, Trust, University, College or School.
- Local Requirements
As a matter of local company law the company MUST maintain a registered office address within Delaware and must also appoint a Delaware resident as registered agent.
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Remark:
Whilst every effort has been made to ensure that the details contained herein are correct and up-to-date, this information does not constitute legal or other professional advice.