Taxation of Limited Liability Companies owned by foreign entities in the United States
In the dynamic world of business, the United States offers attractive opportunities for foreign entities, particularly in the formation of Limited Liability Companies (LLCs). This article provides a comprehensive overview of the tax implications for foreign-owned LLCs, focusing on the U.S. Tax Guide for Aliens (IRS Publication 519).
Georgia and Nevada, known for their favourable tax structures, are popular destinations for business formation. Nevada, for instance, boasts no corporate income tax or personal income tax, while Georgia exempts income earned by corporations from corporate income tax.
For a foreign-owned LLC, the income is considered U.S. source if it is effectively connected with a U.S. trade or business. This income is reportable by the foreign owner on Form 1040NR. The LLC may be treated as a reporting corporation subject to information filing requirements (Form 5472) if it has at least 25% foreign ownership.
IP royalties, such as patents, copyrights, etc., are determined by the location where the intellectual property is used. On the other hand, interest income is determined by the residence of the payer.
U.S. companies and U.S. bank accounts can be held by both foreign and domestic clients. Incorporating in Nevada can substantially lower a company's overall tax burden compared to other states. However, maintaining a website by a Delaware company does not necessarily constitute "doing business in Delaware."
Non-resident aliens often choose to form and own a limited liability company (LLC) in the United States. Georgia provides an excellent environment for starting and operating a business, even for nonresidents. Registering an offshore company in Delaware, USA, is also an option.
It's important to note that the sale of real property is determined by the location of the property, while business income derived from personal services is determined by the location where the services are performed. The sale of personal property is not specifically mentioned as to where the determining factor for its source is.
This article is written by Sergei Tokmakov, who can be contacted at [email protected] and his website is provided. For more authoritative guidance on determining U.S. source income and connection to U.S. trade or business, refer to IRS Publication 519.
[1]: IRS Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business [2]: IRS Publication 519: U.S. Tax Guide for Aliens [3]: Form 1040NR: U.S. Nonresident Alien Income Tax Return [5]: IRS Publication 515: Withholding of Tax on Nonresident Aliens and Foreign Entities
- For foreign entities considering business formation, popular destinations in the United States include Georgia and Nevada, which offer favorable tax structures, such as Nevada's absence of corporate and personal income tax, and Georgia's exemption of corporate income tax on income earned by corporations.
- To ensure compliance with U.S. tax laws, a foreign-owned LLC may be treated as a reporting corporation and subject to information filing requirements (Form 5472), if it has at least 25% foreign ownership, as outlined in IRS Publication 519.
