Hi Nomad. Today I have a surprise for you: on one hand, an exciting investment opportunity; on the other, a risk you should consider.
If you’ve heard about an LLC in the United States that allows you to pay 0% taxes, you probably know that this is the most widespread idea on the internet, recommended by various “gurus” in tax optimization. But as with all things that seem too good to be true, not everything that glitters is gold…
So, let’s see what an LLC is, when you should create an LLC in the USA, and in which cases you should avoid it and not follow such advice.
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So, what is an LLC in the USA?
An LLC in the USA is a limited liability company where the owners (officially called members) are not personally responsible for the company’s debts and liabilities.
In practice, this means that if a partner, creditor, etc., asks you to pay a certain amount of money, you will only be responsible for paying what your company can afford. In 99% of cases, it would not be possible to collect money from your personal bank account to cover the company’s debt. That’s why it’s called “limited liability”: the liability is limited only to the company’s funds.
Can I pay 0% taxes by creating an LLC in the USA?
It is absolutely possible. But not always, and it depends a lot on what you are doing, where you are doing it, and how.
In general, the U.S. is a high-tax country. That’s why so many Americans want to move elsewhere and even change citizenship. The U.S. is one of the few countries in the world that taxes its citizens on all their worldwide income, even if they live abroad.
And an LLC, while registered in the U.S., generally has to pay a 21% corporate tax. However, not if it is owned by a foreigner.
Any foreigner who does not live in the U.S., has a U.S. passport, a green card, or in any other way is a tax resident in the U.S., can register an LLC in the USA without tax obligations in the U.S. So, whenever an LLC is registered, the owner can decide what tax obligations this company will have in the U.S.: it will be considered disregarded, a partnership, or a corporation.
Could my non-resident LLC in the USA have to pay taxes?
It is worth mentioning that this option of how to tax a company is only available if there is no physical presence of the company in the USA If there is, whether you have an employee in the U.S. or you, the owner, live in the U.S., the only possible option is to have a corporation and therefore pay 21% in taxes.
But if you don’t have a physical office, employees, etc., you can choose to treat the LLC as a disregarded entity or a partnership.
A disregarded entity is possible only if there is one owner of the company (officially called a “single-member LLC”). This practically means that, although a company is registered in the U.S., for U.S. tax authorities, this company almost doesn’t exist, which is why it should be “disregarded.”
If an LLC in the U.S. has more than one owner, it cannot be considered a disregarded entity and will be treated as a partnership.
So, in practice, it is true that you pay 0% taxes in the U.S.: either because the entity is disregarded for tax purposes if it is a single-member LLC or it is treated as a partnership in the U.S.
In what situations will I not pay taxes with my LLC in the USA?
Yes and no. That completely depends on how the LLC in the U.S. is treated in the country of your residence. We will give you four examples: the good, the bad, the very bad, and the very, very bad.
Let’s start with the examples, going from bad to very bad, and ending with the good one… Don’t miss it!
As you will see, an LLC will not be treated the same in two countries:
How does a U.S. LLC get taxed in Canada?
Canada treats U.S. LLCs differently than the IRS (the federal tax authority in the U.S.). Canada considers U.S. LLCs as corporations and does not recognize the pass-through treatment that the IRS does.
So, if you are a tax resident in Canada and, for some reason, such as good banking, payment gateway, you specifically need an LLC, you might opt for it to be treated as a corporation in the U.S. This means that you will pay taxes in the U.S., of course, but in this case, you will not face the possibility of double taxation of the same profit twice.
How is a U.S. LLC taxed in the United Kingdom?
There is again a discrepancy in the treatment of U.S. LLCs by HMRC (the United Kingdom’s tax authority) and the U.S. IRS. While in most cases, the IRS does not impose any corporate income tax on LLCs, all tax liability falls on the owners.
However, the United Kingdom has very complex rules regarding U.S. LLCs. In most cases, they would be treated as corporations and not as pass-through entities. This means that all distributions would have to be taxed as dividends and subject to U.K. tax rules.
However, how U.S. LLCs would be treated exactly-as pass-through entities or as corporations-willbe decided on a case-by-case basis by the tax authorities. So, without proper advice from a consultant who understands the U.K., do not register a U.S. LLC if you are a tax resident in this country.
How is a U.S. LLC taxed in Spain?
In Spain, it depends on whether you registered an LLC and control and manage it entirely from within Spanish territory. If so, even if the company is registered in the U.S., it will be considered a tax resident company in Spain.
The other scenario is that you do not manage it yourself from Spain and that there is a nominee director handling the company from abroad. However, again, in this case, the income of the U.S. LLC is subject to taxes in Spain up to 47% as it is subject to the IRPF (personal income tax).
How is a U.S. LLC taxed in Paraguay?
And the cherry on top, Paraguay-the good, the beautiful, the wonderful: Paraguay has a territorial taxation system. There are many countries in the world with territorial taxation systems. But don’t assume that all countries with territorial taxes have the same rules: for example, if Paraguay allows a 0% tax treatment for U.S. LLCs, then not all other countries with territorial taxes will be the same.
For some countries with territorial taxes, having a U.S. LLC is definitely not an option and will lead not only to a high tax rate but also to other administrative issues in managing this company.
However, in the case of Paraguay, it is indeed the case that those who are residents here do not have the obligation to pay taxes in the U.S. and at the same time are not required to pay taxes on the LLC in Paraguay.
How is a U.S. LLC taxed in Uruguay?
Uruguay is distinguished by its territorial taxation system, which means it only taxes income generated within its borders. This makes Uruguay a favorable tax environment for U.S. LLC owners, as income generated outside of Uruguay, such as that from a U.S. LLC, is not subject to Uruguayan taxes.
This approach allows tax residents in Uruguay to enjoy a reduced tax burden on their foreign income. U.S. LLCs operated by Uruguayan residents can benefit from this exemption, as long as the income does not have a Uruguayan source.
Additionally, Uruguay does not impose Controlled Foreign Corporation (CFC) rules, meaning there are no automatic taxes on income from foreign subsidiaries or affiliates. This absence of CFC rules, combined with the territorial taxation system, provides significant flexibility for international tax planning.
How is a U.S. LLC taxed in Panama?
Panama is known for its territorial taxation system, meaning only income generated within the country is subject to tax.
For a U.S. LLC, this means any income generated outside of Panama is not subject to Panamanian taxes.
Businesses operating within Panama must pay a 25% corporate tax on Panamanian-source income. This system offers a great advantage for LLCs looking to operate internationally without additional tax burdens on foreign income.
