Discussion:French owner - US LLC - considerations for election as Corp

Any one have any thoughts on how to approach this decision? Or something I haven't thought of. A bonus would be if anyone can clearly explain how the LLC owner will be taxed in France (because I'm having a hard time with the tax treaty - revised 12/2004).

In general though, you seem to be looking at the right issues. Another aspect that you may want to look at are the U.S. gift and estate rules that will apply to the French owner. The U.S.-French Gift & Estate Tax Treaty may come into play. I do not know the French tax treatment.

What I was suggesting is that if we accept the default tax classification of the LLC (i.e. taxation as a partnership), we would be required to withhold and remit 35% federal taxes on the French owners share of the profits. This is what is driving me to consider electing to be taxed as a corporation. The French owner has no other US business activity nor any other reason to file a US tax return.

If I thought we could manage the profits to keep within the 15% corporate tax bracket, does the corporation begin to look more attractive, particularly with preferential tax rates on qualified dividends (and preferential treatment under the US France tax treaty for dividends)?

No matter how we cut it, we are going to have a variety of reporting issues to deal with because this US company will be buying products from a related French company (owned 80% by the same individual who owns 60% of the US LLC) to sell in the US. So although this is new to me, I believe we have Form 5472 reporting requirements to deal with transfer pricing issues. And the French company is already manufacturing in a tax haven so they are familiar with international tax strategies - the problem is, my new counterpart on the tax/finance side in France only speaks French!

Any wisdom?

Since the majority S/H is controlling the foreign company, yes, you have transfer pricing issues.

And the French company is manufacturing in a tax haven country where there will be reporting requirements on that activity as well.

For tax purposes, a NR that owns an interest in the US partnership is considered to be engaged in a US trade or business so the treaty may allow for a reduced treaty rate on these payments from being actively engaged in this trade or business in the US. Since that is true, then also the NR can combine his/her income from ALL US activities and report them on his/her 1040NR. So, if the France company is also doing business in the US through some sort of branch or subsidiary, then this can be accounted for along with the income from the partnership.  :)

You're right that this is complicated but probably not all that unusual. The core issue is that I'm advising an LLC with a majority non-resident alien owner (from a treaty country) about whether or not to elect taxation as a corporation. The tax haven issue was a bit of a red herring and I shouldn't have mentioned it but I included it only to show that the French owner has a bit of a distaste for taxation (which I believe is common in many European Union companies with burdensome tax systems). I won't be involved in any tax compliance for the French company or its tax haven subsidiary - only with the US tax compliance for the French owner and the US LLC. My background is as a CPA with my only significant international experience being with Australian citizens successfully claiming treaty exemptions through the use of a Private Letter Ruling.

The French NR has no other US business activity - and the transactions between the French company (that he also owns) and the US company will be on an arms-length basis - or at least that's the plan. Clearly Form 5472 reporting will be required.

There is no treaty relief for effectively connected business income so the NR LLC owner won't get any treaty relief under LLC taxation - although he would get treaty relief on dividends from a US corporation if we elected taxation as a corporation. (5% under the US/France convention).

I was hoping that my notes might happen to trigger something with someone who has LLC clients with foreign owners - and in particular, LLCs that were in a non-real estate trade or business. I'm trying to weigh the tax differences of the LLC vs. corp, the compliance differences, and the level of entanglement that the French NR will have with the US tax system. I'm leaning towards electing taxation as a corporation and am looking for someone to talk me out of it! And the situation is complicated by the fact that 40% of the ownership is in the hands of US taxpayers, who face different decision factors.

Obviously, I need to sort most of this out on my own but I thought I might get lucky and find someone who has worked through this exact decision process in the not too distant past.

With flow-through treatment, the French owner's share of the LLC income will not be eligible for treaty relief since it is effectively connected US business income - 35% withholding is required under IRC sec. 1446 (Forms 8804 & 8805).

There are a variety of reasons that they don't want to have the US LLC be a branch of the French company, so its not fruitful to examine that possibility.

However your point about what happens if the US company is profitable, or better yet (worse?), if it is sold, is one of the things that concerns me most about treatment as a corporation.

I'm putting an e-mail together to them and one of my primary questions to them relates to their projections of income over the next several years, as well as their long-term goals regarding a possible future sale of the company. Also, I'm going to ask their French tax accountant to weigh in with his opinion because its unclear to me how the US profits of an LLC will be taxed in France. For many foreign countries, the US LLC is treated as a corporation rather than as a flow-through entity. So it may be that the taxation in France isn't a mirror image of the US taxation.

Can you think of any other questions to ask? We have until the end of July to make a decision on a tax classification election.

Also, I recognize that 35% wiil need to be withheld under section 1446 on effectively connected income with no treaty relief. This withholding amount, however, is not the final tax due. It is very similar to an estimated payment. Have you done any calculations to determine how much the actual tax due on the 1040NR will be?

Another item that may or may not be important is state income taxes under both the corporate and partnership structures.

Yes, the 5% treaty rate on dividends is applicable if the French individual directly holds ownership in an LLC which has elected to be taxed as a corp. And my uneducated guess is that 5% US withholding will be creditable in France.

Haven't yet determined the actual tax due on 1040NR will be - and I'm not sure if the French owner is too excited about a US tax return (still to be determined). But you're right that I should have those numbers available when I present the options.

I think the state income tax issue will turn out to be a wash.

Lots of message board traffic about foreign LLC owners - I'm hoping a consensus will begin to emerge. I'll keep my eye on things over the next several days.