Using a US Limited Liability Company to Establish Your Own US "Tax Haven"

Most financial experts agree that the United States is a primary location for international business. The presence of good banks, advanced infrastructure, a consistent legal system and a stable government are all characteristics of the United States that are taken for granted.

However, many people do not realize the enormous tax benefits given to "non-resident aliens" making passive income in the United States, or earning income outside the United States and simply using the USA as their own personal "offshore tax haven."

The United States does not tax non-resident aliens for any interest income or dividend income derived from the United States. There is zero capital gains on profits from investments. There is zero tax on income earned outside the USA. Only active United States derived income is taxed. Also, various tax treaties give a United States company certain tax advantages when doing business outside the USA.

The Definition of "Resident"

One of the most important issues is that of maintaining a "non-resident" status. Unfortunately many people confuse the immigration definition of resident with the tax definition of resident. Under the immigration laws of the United States, a resident is only someone who has been given a permanent residence visa. But under the tax laws a resident can also be someone who has maintained a "substantial presence" in the United States regardless of immigration status.

There is a specific formula as to when someone meets the "substantial presence" test based upon the number of days they have been present in the United States for a given year and the two prior years, but to be safe, the non-resident should stay in the United States no more than 182 days in any given year.

The "Pass Through" or "Disregarded" Tax Entity

The best way for a non-resident alien to take advantage of these tax benefits is to use the Limited Liability Company (LLC). A Limited Liability Company is an entity that has the same limited liability characteristics as a corporation, but the ease of management characteristics of a partnership.

If properly structured, the Internal Revenue Service (I.R.S.) views the LLC as a "disregarded" tax entity which means that the I.R.S. disregards the existence of the LLC and treats the income as if it were earned by the members or shareholders. If there are two or more members of the LLC, then it is treated as a partnership and must file a partnership tax return. If it has only one member who is an individual then it is treated as a sole proprietorship. For a non-resident alien, this means that the LLC is disregarded by the I.R.S. and income of the company is taxed at the more beneficial non-resident rates, and unless it earns active income derived from U.S. source income there is no reason for the LLC to even file a Federal tax return. Yet for all other purposes the LLC will be treated as a "domestic" entity. As far as banks and other parties are concerned, the LLC is a US domestic entity.

There are many states in which you can form an LLC. In the past we suggested the use of a Delaware LLC. Delaware has traditionally been the jurisdiction of choice due to the fact that Delaware case law is more mature and developed. However, in recent years, Delaware has suffered some serious set-backs. It is now considered a “suspect” jurisdiction by many countries, and is undergoing further scrutiny by US Federal authorities. As such we now suggest Texas which provides similar legal benefits. Depending upon your circumstances there are other states that might also prove helpful.

How can a U.S. LLC Help You?

There are a lot of ways a non-resident alien can benefit by using a US LLC:

  • An investor looking to invest in stocks, bonds or other types of investments in the US will pay no tax on the income earned, and will also avoid withholding.
  • Investments in U.S. real property can be done with no capital gains, and with careful treatment, no withholding.
  • An investor can use the LLC to do business outside the USA since it will be outside the jurisdiction of the I.R.S., yet gain valuable tax reduction benefits that may accrue to U.S. entities.
  • An investor may be able to reduce non-U.S. taxes since the U.S. has tax treaties that often give very favorable treatment to U.S. entities. (An example would be the US LLC owns land or other property in a jurisdiction with a tax treaty with the US - this will often reduce capital gains to zero.)
  • Some investors are able to obtain tax benefits by using "transfer pricing" strategies that transfer otherwise taxable income from a high tax jurisdiction to the no/low tax US LLC. (An example would be a non-U.S. buyer of goods and or services using the US LLC as a middleman for purely export purchases as long as the US LLC avoids certain pitfalls there will be no taxes on income earned from such transactions.)
  • Finally, the US LLC may just be a very nice way of protecting assets in a private and secure manner by simply depositing funds into a US bank account, brokerage account, or insurance policy.

Advanced Planning Techniques

There are other more advanced ways of using the US LLC, often with other entities, that can further enhance privacy, asset protection and tax reduction.

One method is to have a specially designed International Privacy Trust serve as the owner of the LLC. If properly structured and maintained (and depending on the jurisdiction of the client), the International Privacy Trust will act as a bullet proof asset protection and probate avoidance vehicle (two very reasonable goals that will defend against “sham entity” accusations) while at the same time serving as a very strong tax reduction strategy (the Trust’s jurisdiction is a “No Tax” jurisdiction).

Also, because of the way in which the International Privacy Trust is structured, without court order it will be very difficult to discover the true ownership of the US LLC (and even then it will probably need to be a court order from the jurisdiction of the trust).

For some clients the International Privacy Trust may not be enough. For those clients it may be important to have a corporate/business entity have a more dominant role. In these cases we advise our clients to utilize a United Kingdom Limited Partnership.

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