Discussion:New LLC Formation - Foreign Member

By my own thinking, the only way to have the guaranteed payments and the distributive share of LLC income not attributed to her personal TIN and go to her Canadian Corporation is to have the corporation be a member of the LLC.

Can this be done? Does that Corporation get a K-1?

If not, are there any other creative ways to structure payments so they don't go to her directly? We could treat her corp. as a vendor, and not have her as an individual receive an guaranteed payments or share of income, but this doesn't seem right...

Any thoughts would be greatly appreciated.

I did not call the LLC a Corp...3 partners as individuals, the last as a Canadian Corporation.

I thought about your suggestion, and would actually much prefer to go that route. What about the ownership component?

If she is treated simply as a vendor, and not a true LLC member, how could we go about protecting her rights and ownership in the LLC?

Technically, in going the vendor route, she would not have any ownership in the LLC or its assets. Since she is going to be materially participating, and not merely managing, the ownership component does seem to become more important.

She, as a foreigner has to report all income from US sources even if she is an individual; and she has to report it from a Corporate standpoint as well if the Corporation owns part of the LLC. In either case, she has to report income from US sources whether it be fixed income or earned income.

If she provides services to the US LLC, then some of this as well will be taxed to her at an individual level as well as determining her days present in the US for resident purposes.

No matter how you structure it, any income generated in the US (if not exempt from a treaty) will be taxable income to her in the US. As well, state taxes are not governed by a treaty....

I am in the process of organizing the LLC right now - I have not started the process just yet until I determine the best structure for this Canadian member.

It is a 4 person LLC...Is the 25% ownership a firm rule for foreign reporting requirements? I don't want to be too cute about it, but if we make her a 20% partner, would this avoid the reporting requirements?

If I am understanding your post, even if we make her Canadian corporation an LLC member, she will still have to report any income the CA LLC pays to her corporation.

Also - clarification on one point..."if she provides services to the US LLC, then this will be taxed to her at an individual level." If all payments for services are invoiced out of the Canadian corporation and not to her as an individual, what income is attributable to her personally.

Looks like there is not too many creative ways around this...I will do a little more research myself in my RIA database.

Again, I appreciate the feedback.

Yes, if the Canadian corporation is an LLC member, then the income from the US will be taxed in the US and Canada as well, but the treaty exemption will apply on some of this income.

If she personally provides services to the US LLC, then she is "working for" the US entity and if she meets the residency test, then she will be taxed on her income from US sources.

If a Canadian wants to work and do business in the US, then their income from US sources is taxed in both the US and Canada except for the treaty exemptions.

I don't know of any way around the reporting requirements. IF she is earning money in the US from sources in the US, either corporately or individually she will be required to report and/or pay tax on it...

- She lives in the US under her Husband's status (H-1 visa). Both are Canadian citizens. - Although she can live here, she does not have a sponsoring employer currently, so she cannot legally work. - As such, whenever she does independent contracting work, she has those folks pay her Canadian corporation. (she has confirmed to me that those folks never followed the reporting requirements for foreign citizens. As such, she has never filed taxes in the US).

Given the above, I want to structure her activity in the LLC as an agent of her Canadian corporation, and keep the Canadian LLC a limited partner (at least until she sorts this out in about a year).

So, at the end of the year, does the LLC file a 1042-S for payments made to her Canadian corporation? What are her US filing requirements if all payments (and K-1 income) are going to a Canadian Corporation).

Pardon my ignorance - this is all beyond my scope of knowledge.

- Tim Doyle, TaxAlmanac Moderator - Talk to me 11:46, 14 July 2006 (CDT)

did She obviously has some issues due to her past involvement in the US that was not reported to Canada as world wide income I would assume and then also, the US did not get any benefits from her income earned here. But that will need to wait I am assuming...

Setting up the LLC as a subsidiary of her Canadian corporation will be complicated at best. The LLC cannot be passive if she is actively involved in the business, so how can you set it up as a passive entity? The resident partner of this is a Canadian citizen, but a resident of the US for tax purposes (visa and substantial presence test). What you are trying to accomplish I think is: she consults and earns income from the consulting, but since she cannot legally work in the US, then it needs to be as an agent of the foreign corporation.

If this is so, then why cannot her corporation in Canada file as a foreign corporation in the US and receive an EIN and report it's income on an 1120F for any US source income? Now, the downside of this is that she has created nexus and therefore will have state taxes on top of it all.

Citizens of Canada are taxed on worldwide income, so some treaty benefits need to be addressed no matter what type of entity you decide upon.

Nassau is fabulous by the way!! I have seen things which you can never see on vacation. I picked up a new Canadian client this week from here...lots of Canadians work on this island. I may not be back to the US until the 30th now...more work than was originally expected, but we shall see.

You can email me if you like at sandy@sandyseacs.com

Take care and let me know what you think about the above :)

I have searched two days for the answers of some tax issues for my new company, which is supposed to be LLC., and could not find any good one. I meant, I found some answers, but they are either uncertain or conflicting. And then, I suddenly ran into this page and found that most of question has been answered here!! You guys are amazing!!

My situation is very similar to Mike's. ( Mike, I hope you already find the best solution for your partner:-) ) I also have a potential Taiwanese partner who is not US citizen. What different from Mike's case is that my partner is in China and he only want to invest money to get 5% of my company. The State governments told me that they do not know anything about income tax.. a Delaware agent told me that this partner will not be taxed anywhere.. my friend in Deloitte told me that he will need to have a tax ID and be taxed in the States...what a mess..

Now, thanks for Sandy, I know that since he will hold share less than 20% and he is definitely not US resident, he will "Not" need to pay US income tax in LLC. Here, would somebody please give me the answers for two follow-up questions?:

1. Is there any form I need to file for my 5% foreign member to IRS to waive the income tax? 2. I will have another Taiwanese company as our major partner, and they will get about 40% of our net income. Since the member of LLC can freely split the profit and lose according to the law, is that possible that I let this Taiwanese company hold 20% of the company but distribute 40% of the income to them to avoid the US income tax? Or the US income tax follows the % of distribution not % of ownership?

My question might be a little "Rookie" for you guys.. but if you guys can help me on this one, it will be highly appreciated.

Thank you thank you..

Wei in North Carolina  :)

Simple equation is: US source income derives taxes to the US; foreign sources to forein taxes....

Sorry; I just got back from a 25 hour drive; I am exhausted; perhaps email me in the morning and I can help further :)

To answer your specific question, under this structure the foreign individual partners will have to obtain ITINs (W-7) and the foreign corporate partner will have to get an EIN (SS-4). There are alternatives to such a complicated structure, but there is no silver bullet and the analysis is too complicated for a bulletin board such as this.

It is complicated, but at least it is more interesting than the run of the mill stuff we usually have to deal with. :)

I always enjoy doing the harder stuff and having to do some research. To me, it just constitutes continuous learning and helps me provide more value to more clients in the future.

What I might do is to put in the "operating agreement" to distribute more loss to the US investor. Something might be like: First 2 years, the US investor get 90% interest(basically loss), foreign investor 10%. After the two years, the US investor get 40% interest(hopefully profit), foreign investor 60%.

Besides, it is better to put the members as active members instead of passive members for tax purpose, since the passive loss can only deduct the passive gain.

I am 99% sure about what I wrote, but not 100%, since I did not realy apply it yet. If there is anything wrong, hopefully, someone can point it out.

Have a nice one,

Wei

The investor MAY need a TIN if they receive periodic payments from the Corporation and if they are more than 25% owner of the corporation, this too gets reported to the US. If the income is determined to be US source income or income from periodic payments, then they will need to report that income to the US.

The bylaws would need to indicate what percentage of ownership each s/h has and then they receive payments based on their proportionate share of income/expenses due to stock ownership. A C corp will be paying dividend payments and taxes need to be withheld to a non-US person unless the treaty overrides that I believe. In order to withhold the taxes, then the individual needs a TIN.

I am not sure what the question is Wei. If this is going to be a C corp and the foreign s/h is earning income effectively connected with a US trade or business, then this income is taxable in the US as well as periodic payments connected with that trade or business....

If I am confused about what you are saying, someone let me know please :)

About the distribution of interest, I was talking about the LLC, not C Corp. For my understanding, in LLC, the Operating Loss can be pass to the member. And the way to distribute the loss/profit does not need to be accordant to the % of ownerhip.

Wei :)

I'm thinking about forming an LLC that will have a Canadian member. However, this will be a nonprofit LLC. The situation gets a little sticky though. Basically It will be an investment club set up as an LLC. We will pool funds (which will be donations in essence), they will be invested then at periodical times we will cash in the investments and the profits will be given to nonprofit ministries. So, the members of the LLC will not receive any income.

How will this affect the Canadian Member and are there special requirements to set up a foreign member in the US? Do you have any resources as to what they would need to do or what I would need to do. Thanks!

I have a question about forming an LLC and subsequent tax reporting. Can a Canadian Citizen who is on H-4 (Spouse of a person holding H-1) who is residing in US and has a SS#, be a partner in an LLC? The other partner in the LLC is a US permanent resident. Would appreciate your feedback.

You can however as a foreign individual own an LLC either as a partnership or Corporation; the type of visa you have will limit what involvement you have in this business however.

"In Donroy, Ltd. v. United States, 301 F.2d 200 (9th Cir. 1962), the court held that the U.S. permanent establishment of a partnership was attributable to a foreign person that was a limited partner under the 1942 U.S.-Canada income tax treaty. In Unger v. Commissioner, 936 F.2d 1316,1319 (D.C. Cir. 1991), the court followed the holding in Donroy, noting that it stood for the proposition that the office or permanent establishment of a partnership is, as a matter of law, the office of each of the partners—whether general or limited. See also Johnston v. Commissioner, 24 T.C. 920 (1955) (holding that a partnership’s permanent establishment is deemed to be a permanent establishment of its partners); Rev. Rul. 90-80, 19 90-2 C.B. 170 (same)."

Because the U.S. office of the partnership is attributed to the Canadian partner, the partner has a U.S. permanent establishment.

Kenneth, before I forgot to mention that the Canadian partner will need to file Form 1040NR.

Sandy, you also state that there could be a reduced treaty rate on the income, depending on the type of income. Again this is wrong. If the income is attributable to the permanent establishment, then no special reduced rates apply. If the income is not attributable to the permanent establishment, then, while certain non-effectively connected income might normally qualify for treaty benefits, in this case the income would not qualify for treaty benefits because the income would not be "derived by" the Canadian LLC member because Canada does not treat the LLC as a flow-thru entity. See Reg. 1.894-1(d)(1).

Yes, if income effectively connected with a trade or business is taxed just like a US resident is taxed....I think we agree but I don't think I either am understanding his question or you know more about what his situation is than I do.

If the partner is not actively engaged and there is no operating of a business in the US, then income is treated with a reduced treaty rate on some areas of the income.

My question still is: what business is the partnership in? Is this a passive (no permanent establishment) or is this operating a trade or business? Questions about assets, intangibles, offices, employees, etc. have to be answered to determine the taxation of the partner...imho :)

Moot issue; poster has not responded and this is a topic for pure discussion only I assume :)

If it is passive income and the partnership is NOT engaged in a trade or business in the US, then you only will have to claim treaty benefits and pay taxes that are due under the reduced treaty rate :)

Please accept my apologies on this....

If the US LLC has passive income or holds real estate, then different rules may apply.

Although there are no U.S. issues preventing a Canadian from investing in an LLC, the Canadian rules are very harsh. SMKTAX is correct that Canada treats the LLC as a corporation with no flow through. Distributions from the LLC are taxed as dividends. Canada's foreign tax credit "baskets" consist of Business and Nonbusiness. The income earned by the LLC would be considered business tax and the dividend income is nonbusiness tax. As a result, the Canadian does not get a credit for the U.S. tax paid causing double taxation.

We usually recommend that a U.S. subsidiary of the Canadian corporation hold the LLC interest. As long as the business income is active (not investment), this results in the lowest tax rate.

You may be creating nexus in the US based on services and offices in the US. Is this only a letterhead that indicates it is a US based business in DE?

You are taxed on US source income, or US persons are taxed on world wide income....you had best look clearly at what is the amount of involvement in the US and what income could be attributed to an office in the US....

Who knows what the final written provision will actually look like.

https://www.cpa2biz.com/News/Journal+of+Accountancy/2007/April+2007/Taxing+International+Transactions.htm

As in Organizer instead of Incorporator.

I do not recommend the creation of a new LLC. There may be some complications from a Canadian tax perspective as well. You should also discuss the proposed structure with a Canadian tax advisor as well as with a U.S. tax advisor.

From what I know, he currently owns two partnerships (in Lebanon) and one corporation (in Greece)both which design and create custom jewelry. He would like to start designing jewelry for US customers but has a B-1 visa that does not allow him to "work" in the US. He is, of course, both the designer and business manager of the operations and would therefore be an active participant in any work performed for US clients.

Can someone offer any advise on how to proceed??

John Huddleston Seattle Bellevue Tax Accountant

John Huddleston Seattle Bellevue Tax Accountant

2 friends and I formed a simple Canadian partnership to hold our units in a California LLC. The california LLC is simply an investment vehicle in that it was mandated to collect all funds from investors and then put that money into the actual operating company (forgot the operating company is an LLC or incorporated). The funds from the 3 of us in Canada amount to a maximum of 1% of the total investment in the LLC. From what I have read above, regardless of our % ownership, we...

1) In Canada, we will only be taxed once we actually receive money, the is no "flow-through" of losses or gains...only distributions??

2) will be subject to a federal withholding tax (35% ??) and possibly a state withholding tax because we are non-residents and LLCs are not in the Canada-US tax treaty??

3) In that case, we would be hit with double taxation (US and Canada)? To go one step further, if there is no flow-through to canada, then in theory the taxes paid in the US cannot be used to offset Canadian taxes and so we would lose 35% in the US and then taxed in Canada on money we receive??

4) What is the best way for us to hold our units in the LLC? Should we incorporate a company in the US and flip our units into that company so as to take advantage of the Canada-US Tax Treaty?

Thank you so much and hopefully someone can help....Greg

I registered a single owner LLC in the state of New Jersey in 2005 and have been filing Schedule C for the tax return. i.e. I already have a EIN (Employer Tax ID number) "in addition to" my Social Security Number - AND have been filing tax for the last three years.

1) I would now like to transfer 100% ownership to a foreigner (citizen of India). Can someone please explain the process ? Fact: No money is involved in the ownership transfer. 2) Does the foreigner need to apply for a TIN "in addition" to the existing Employer Tax ID number ? 3) The foreigner would like to pay New Jersey taxes and keep the income in US - do we need to report this income in the home country (India) of the foreigner - even after paying NJ / Federal taxes ?? 4) We have US based employees. Does anything need to be done differently ? What tax forms apply ?

Would appreciate if someone can answer OR suggest the right place/people to get answers.

thanks a bunch in advance !

M-A

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Is that true that I will also need to attached W7 and Form 8805 with the form 1065? If the company has a loss, do they still have to file form 8804 or 8813? Are the calculation based on Gross income or net income? What other requirements are needed with filing the W7, any ideas? Please help. Thanks.