Forming a legal LLC under EU tax law - clear instructions

The problem of the single-member LLC in Europe

One non-domestic A single-member LLC can certainly pose tax challenges for the EU founder in his home country (tax trap):

1. Tax transparency: In the USA becomes a single-member LLC treated as a "disregarded entity" by default. This means that it is transparent for US tax purposes and is not taxed in the USA (exempt LLC). Explanation "Disregarded Entity": A "disregarded entity" is a company that is not considered a separate entity for US tax purposes. For a single-member LLC, this means that all income and expenses are attributed directly to the owner as if the company did not exist. The owner reports all business activities of the LLC on his or her personal tax return.
2. Different treatment: The problem arises when the EU home country has the LLC classified differently than the USA. For example, it could be classified as a corporation, which means that all taxes that would otherwise apply to normal domestic corporations are payable in the home country.
3. Possible double taxationIf the home country classifies the LLC as a corporation, this could lead to double taxation, with both the LLC and the owner having to pay tax.
4. Complex tax returnsThe EU founder may have to submit complex tax returns in both countries.
5. CFC rulesMany EU countries have Controlled Foreign Corporation (CFC) rules that can result in LLC profits being taxed in the home country even if they have not been distributed.
6. Withholding taxDepending on Double taxation agreement withholding tax may apply to payments from the USA.
7. Verreinvoice priceeTransactions between the LLC and affiliated companies in the EU home country may be subject to transfer pricing rules.

Our goal

We want to know how it is possible to legally form an LLC and enjoy all the benefits of the LLC, including limited liability and EU tax advantages. A company similar to a corporation, but without corporate and trade tax in the US and EU.

Is Corporation a solution?

Many law firms suggest setting up a corporation, which makes sense if the entire income of the company is to be converted into tax. Double taxation, no thanks! . Some "experts" claim that a corporation is a better and dispute-free solution, since a single-member LLC without substance in the USA is regarded as a corporation in the EU and can lead to disputes. But is this really a solution?

Don't believe the law firms that offer a corporation!

When an EU citizen establishes a US corporation, the following important points arise:

1. The US corporation is generally regarded as an independent corporation in the EU.
2. Profits are initially subject to US corporate income tax (currently 21% at federal level).
3. Dividends paid out are taxed as income from capital assets in the founder's EU home country.
4. CFC rules could be applied.
5. Transfer pricing rules must be observed.
6. There is a permanent establishment risk in the EU.
7. The EU founder must disclose his shareholding in the US corporation.

So what is the right solution?

To be recognized as a partnership in the EU (partnership) In order to be considered an LLC (Limited Liability Company) in the USA, it should be treated as a partnership for tax purposes. Specifically, this means:

1. Form a multi-member LLC in the USA.
2. Do not make the election to be taxed as a corporation.
3. Choose a member-managed LLC structure.
4. Please note that the transferability of units is restricted.
5. Filing articles of association in the USA and in the tax domicile

The articles of association for correct LLC classification

The company's operating agreement defines important aspects such as

• Transferability of shares
• Partnership structure
• List of members
• Distribution of shares and many other important things.

Due to the complexity and importance of the Articles of Association for the correct tax classification of the LLC there is a separate article on this topic. This deals in detail with all the relevant aspects that must be taken into account in the articles of association in order to achieve the desired tax treatment in the EU.

And if you have done everything correctly, then no corporation and trade tax is due

If correctly structured, a non-domestic multi-member LLC with no substance in the US, formed by EU residents and organized in the EU as a Partnership is recognized:

1. Liability remains limited
2. US taxation:
   • No corporate income tax in the USA
   • The LLC is recognized in the USA as a transparent unit treated
3. EU taxation:
   • The LLC is as Partnership recognized
   • Taxation takes place at shareholder level (EU citizens)
4. Taxation of EU founders:
   • Only the personal income tax of the founders in their EU home countries is due
   • The profits of the LLC are attributed directly to the shareholders

Important to note:

• The exact tax treatment may vary depending on the specific EU country
• CFC rules could be applied
• The founders must disclose their participation in the LLC and the resulting income
• The LLC should not carry out any significant business activities in the USA (ETBUS)

This structure is absolutely legal and in line with EU tax law. It means that, as a rule, only the founders' income tax is due in their EU home countries.

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