How do non resident owners of multi member LLC get taxed? All the other members are US residents. Is it better for me to buy in my portion of LLC with a foreign LLC or to go as an individual?
Sure I can address. As the default setting a US LLC with multiple members reports in the US as tax partnership as covered in Section 301.7701-3(b(1)(i). Accordingly, the tax partnership passes its US operating income through to its members (tax partners). The members then report their share of the income and expense on their individual tax returns.As a non resident tax person, you could hold the LLC membership individually or you could from a United States Corporation “USC”) for holding your interest. I will explore both options here.If you hold the LLC membership directly, you will report your share of the LLC’s income and expense on a 1040 Non Resident tax return. Here, I am assuming the LLC generates US source income from United States Trade or Business which my definition has effectively connected income under Section 871(b). In addition, if your membership reaches 25% or greater, Treasury requires the LLC file an annual report under Section 6038(A). Failure to file results in a $10,000 penalty under subsection (d)(1). In addition, you require an individual Identification Tax Number (ITIN) for filing purposes (Section 6109(a)). We would obtain this ITIN in early 2021 as part of filing all other requirements with Treasury.Or, you could form a USC in which you hold the shares. Then, USC invests in the LLC membership interest. USC includes its share of the income and expense from the LLC on its 1120 Corporate tax return. Then, USC distributes dividends back to you. Under Section 871(a), the LLC withholds 30% tax on the USC dividends distributed back to you. Though, we first look at tax requirements then we turn to a Bilateral Tax Treaty between your home country and the US for possibly mitigating the tax results. Article 10 of the US Model Treaty allows a 15% reduced rate for dividend withholding. Treaties may vary slightly though the treaty will reduce the withholding rate. In addition, you can use the US taxes withheld on the dividends for a foreign tax credit in your home country. In this fashion, you do not pay tax twice on the same income. Again, Treasury requires the foreign shareholder of USC file an annual report as detailed in Section 6038(A). Non compliance results in a $10,000 fine under section (d)(1).As an example, say you had $100X dividend. The LLC withholds $15X based on filing the specific treaty position. In your home country, your taxing authorities tax you $20X on the dividend. You can apply the $15 you paid in the US against your $20X home country bill resulting in an additional $5X tax paid. Accordingly, you paid $20X total —- $15X in the US and $5 in your home country for the dividend from your USC.A person could ask ‡ which to use ‡ invest as a member directly in the LLC or invest through a new USC.The safest method for avoiding double taxation rests with non tax resident using USC. As, in particular home countries, the LLC’s particular tax vehicle form in the US may not match up with the home country’s particular vehicle tax form. This fact may result in the loss of the foreign tax credit. Or, if we required a Tax Treaty position, Article 1 of Paragraph 6 of the US Model Treaty may prevent the non tax resident from using the treaty.I have drafted the above analysis based on this particular fact situation, If the facts change in any way, we may see a significantly different tax outcome. www.rst.tax