Can the taxmen determine where my USA LLC is run from

[DonnieDarko14]

I am also planning to consult a lawyer but first I thought I could ask here.
I live in Romania and I'm a Romanian citizen. I run an online business and the only company I will always get payments from is in Luxembourg. Because I thought I would have to pay VAT here after I exceed 60k I decided micro company isn't feasible. Meanwhile, I found out that it might be possible to do reverse VAT or idk how to call it and not have to pay the local VAT so I might switch to that in the future.
I consulted some offshore company site and the guy told me I can have an LLC and the only taxes I would have to pay is the 5% for the dividends I receive. So I did that and now I have an LLC and a TW account I receive my money in. I just supposed they would have no way to find out the LLC owes taxes here and no one would ask me anything but I'm not so sure now. The business is not publicly advertised or anything. I provide online services for a company in Luxembourg, I send the invoice and they send me the money. The only way they would know for sure what's going on is if they raid my house and look through my files. But given the fact that I'm the only owner and the LLC has no employees, could they assume it's run from Romania?
Also, I found out the LLC can't give dividends, but distributions. I don't think there is an equivalent for that in here so I assume they will be taxed as dividends. What kind of paperwork can I give to the taxman if he asks me to prove that I acquired this money legally?

 

[Sols]

It's clear you didn't do enough resource before you started but hopefully you can sort this mess out before it's too late. What you're doing right now in tax evasion and can land you in serious problem in the future. Hopefully a good local attorney can help you clean this up.

Don't try to dodge VAT with a US company. You made a mistake by not getting a VAT number and VAT registration right away for your Romanian company, but you can fix that. As long as your Luxembourg business partner is also VAT registered, you can either charge zero VAT or claim VAT back later (depends on local law).

Whether it's CRS or just a simple local tax audit triggered by your lifestyle not matching your declare income, the current structure risks falling apart. What's your plan when Wise eventually sends a report about your account to the authorities and that report then goes to the Romanian tax authority?

Also, I found out the LLC can't give dividends, but distributions. I don't think there is an equivalent for that in here so I assume they will be taxed as dividends. What kind of paperwork can I give to the taxman if he asks me to prove that I acquired this money legally?

Declare the income and pay full tax (corporate income tax, VAT, dividends/withholding tax, social security, and so on), then everything is legal. In the eyes of the Romanian tax man, the US LLC has the same obligations as a local Romanian company when it comes to tax.

Easiest would be to just stop using the US LLC and switch to a Romanian company. Don't make things worse.

 

[seabreeze]

A few comments:
1) A micro-company isn't feasible past 10,000e cross-border payments, because you have to register for VAT.
2) Generally speaking, LLCs do not make dividend distributions because they are pass-through entities (they are not taxed on profit themselves). They make profit distributions. As such, distributions received from an LLC are not considered as Dividends from the point of view of your tax man, but as general income, which would be taxed at the general income rate. Your assumption that those distributions would be taxed as dividends is, most likely, wrong.
3) You should look into the Double-Tax treaty between USA and Romania. Read on what qualifies as a "permanent establishment" in that document. But long story short, either according to the Romanian Tax Code or the DTT, your taking management decisions and having a home office will constitute a permanent establishment. I can't be bothered to study and simulate the scenarios right now, but this could even lead to your being taxed TWICE - once as a Romanian-resident company (if the LLC will be treated that way), twice as a person receiving distributions from said company. Plus you'd have to bear all the costs of messing with Romanian tax auth. and accountants that can deal with cross-border.
4) They can find out by seeing if there were signs that you were on Romanian soil when particular contracts etc. were signed and dated. They have the right to request such documents.
5) I would advice consulting a local accountant in RO and just seeing all the exotic ways its possible to write anything off and optimize. Given that you are talking about ramping up to 60k turnover, I will assume that any proper foreign tax-compliant structure will be budget-prohibitive to you.

 

[DonnieDarko14]

Whether it's CRS or just a simple local tax audit triggered by your lifestyle not matching your declare income, the current structure risks falling apart. What's your plan when Wise eventually sends a report about your account to the authorities and that report then goes to the Romanian tax authority?

But I only have a company account on Wise. Does wise report through CRT even if the LLC has no official ties to Romania? I transfer the money to Romanian bank accounts and wanted to report the earnings as dividends at the end of the year and pay taxes and social security at the end of the year for that. So I did plan to report every money I got out of the company, just didn't want the company to pay the taxes.

The guy who guided me through this seemed experienced and told me he did this before for Romanian clients, he's Romanian too. He might have lied and be totally inexperienced or he might know something I don't. I just assumed that since it's a foreign company and the Romanian tax man has no records of it operating within Romanian borders it's going to be fine. I thought they could just look into my accounts, see that I receive the money from this company from the USA, and think it's fine.
The company from Luxembourg I work with is very big, has over 100+ million profit a year so they do have a VAT number.

 

[Sols]

But I only have a company account on Wise. Does wise report through CRT even if the LLC has no official ties to Romania? I transfer the money to Romanian bank accounts and wanted to report the earnings as dividends at the end of the year and pay taxes and social security at the end of the year for that. So I did plan to report every money I got out of the company, just didn't want the company to pay the taxes.

There is still some uncertainty as to whether Wise does report, but if they do (or when they start), they will report to Romania because that's where you live.

The LLC is owned/controlled by you in Romania, so that's where the company's economic substance and financial interest is.

They might also report to the US but the IRS probably doesn't care about you (just make sure you file all the necessary forms).

The guy who guided me through this seemed experienced and told me he did this before for Romanian clients, he's Romanian too. He might have lied and be totally inexperienced or he might know something I don't. I just assumed that since it's a foreign company and the Romanian tax man has no records of it operating within Romanian borders it's going to be fine. I thought they could just look into my accounts, see that I receive the money from this company from the USA, and think it's fine.

Those days are long gone. This person's information is 10+ years out of date. Nowadays, the setup you have is extremely fragile. You might get away with it for a year or a couple of years, but it's a ticking time bomb, especially if your business grows and you start going above 100,000 EUR/year.

The statute of limitation for tax evasion is usually quite long, so even if it takes three or four years for the structure to fall apart, you could be found guilty for the whole duration.

The company from Luxembourg I work with is very big, has over 100+ million profit a year so they do have a VAT number.

That's great!

 

[DonnieDarko14]

Those days are long gone. This person's information is 10+ years out of date. Nowadays, the setup you have is extremely fragile. You might get away with it for a year or a couple of years, but it's a ticking time bomb, especially if your business grows and you start going above 100,000 EUR/year.

Thank you for the answers. Really appreciate. I already make more than 100k. The Romanian tax man is incredibly inefficient and is possible that tax collecting is even worse than how it was in other more developed countries were 10 years ago, so there might be a chance the person who advised me knew about this and I'm safe for a while.
It will be extremely hard to find an attorney who knows about this stuff here but I'll try.

Another thing that came to my mind is this: The company I am working with is from EU has a VAT number so I shouldn't have to pay any VAT even if I had a company registered in Romania. All I would have to pay is a corporate tax which is 3% anually. In my case, that would be 6k each year. They just passed a law in Romania and if the tax evasion is smaller than 100k(weird but it's true) and you pay it back they won't criminally prosecute you. Which might mean I'm safe as long as the dividend part is true.