UAE FZ + USA LLC, best way to structure

[jazzybell]

I am trying to find the best way to set up the following structure for my IT service business: the US entity (LLC) to serve as a client-facing company (e.g. be a sales agent or a money processor) in a combination with FZCO that will accumulate most of the profits.
Have somebody had any experiece with such a set-up? What could be the pitfalls?

How to prove to the IRS that the company is an agent or maybe it is better to make FZCO own the US entity but to achieve the passthrough somehow? Would appreciate your recommendations!

 

[overnbeyond]

I am trying to find the best way to set up the following structure for my IT service business: the US entity (LLC) to serve as a client-facing company (e.g. be a sales agent or a money processor) in a combination with FZCO that will accumulate most of the profits.
Have somebody had any experiece with such a set-up? What could be the pitfalls?

How to prove to the IRS that the company is an agent or maybe it is better to make FZCO own the US entity but to achieve the passthrough somehow? Would appreciate your recommendations!

Definitely doable, don't complicate it by making FZCO owns your US entity, I would structure a management / consulting company in Dubai and establish traffic.

 

[jazzybell]

Definitely doable, don't complicate it by making FZCO owns your US entity, I would structure a management / consulting company in Dubai and establish traffic.

Thank you for your response!
I’m just wondering how do you suppose to minimize the taxable income of US LLC?
I suppose if you use your US LLC as a payment processor and get a 1-5% fee, you can get in trouble with IRS, they probably will ask a lot of questions if you send 95% of profits to FZCO. Otherwise, you have to pay US corporate tax + can you advise how to distribute dividends as US and UAE do not have double taxation agreements? Isn’t it a case of withholding tax applied by the US for UAE residents?

 

[overnbeyond]

Thank you for your response!
I’m just wondering how do you suppose to minimize the taxable income of US LLC?
I suppose if you use your US LLC as a payment processor and get a 1-5% fee, you can get in trouble with IRS, they probably will ask a lot of questions if you send 95% of profits to FZCO. Otherwise, you have to pay US corporate tax + can you advise how to distribute dividends as US and UAE do not have double taxation agreements? Isn’t it a case of withholding tax applied by the US for UAE residents?

I should have asked this first, what is your country of residence to begin with?

 

[jazzybell]

I should have asked this first, what is your country of residence to begin with?

I'm resident of Ukraine

 

[Marzio]

WTF are you complicating things with a Dubai company when you could register yourself as a private entrepreneur in Ukraine and pay 5% tax on your LLC profits?

 

[JackAlabama]

Thank you for your response!
I’m just wondering how do you suppose to minimize the taxable income of US LLC?
I suppose if you use your US LLC as a payment processor and get a 1-5% fee, you can get in trouble with IRS, they probably will ask a lot of questions if you send 95% of profits to FZCO. Otherwise, you have to pay US corporate tax + can you advise how to distribute dividends as US and UAE do not have double taxation agreements? Isn’t it a case of withholding tax applied by the US for UAE residents?

Since you are resident and citizen as well? of Ukraine, the IRS will not ask questions about you sending
"profits" out since the LLC is a disregarded entity for US tax (if you perform consulting or programming work from outside US).

 

[RealDude]

WTF are you complicating things with a Dubai company when you could register yourself as a private entrepreneur in Ukraine and pay 5% tax on your LLC profits?

Maybe he has a Russian passport?

 

[JackAlabama]

WTF are you complicating things with a Dubai company when you could register yourself as a private entrepreneur in Ukraine and pay 5% tax on your LLC profits?

That sounds like the best solution if he wants to continue to live there.

 

[jazzybell]

WTF are you complicating things with a Dubai company when you could register yourself as a private entrepreneur in Ukraine and pay 5% tax on your LLC profits?

First of all, there is a limitation on your turnover as PE in Ukraine (not income), now it's around $175K which doesn't work for me if you exceed this limit you are no longer 5%.
Secondly, because of war, there are some banks' limitations on spending, for sure they should keep economics alive but it's not safe for doing business

Maybe he has a Russian passport?

I don't have

IRS will not ask questions about you sending
"profits"

If I got your point right the main point is to keep LLC as a single member and have pass-through taxation to pay taxes in Ukraine.
What if you pass through to UAE as a tax resident of UAE? There is no DTT between US and UAE, is it a case to apply a withholding tax to you by the US?

 

[JackAlabama]

First of all, there is a limitation on your turnover as PE in Ukraine (not income), now it's around $175K which doesn't work for me if you exceed this limit you are no longer 5%.
Secondly, because of war, there are some banks' limitations on spending, for sure they should keep economics alive but it's not safe for doing business


I don't have


If I got your point right the main point is to keep LLC as a single member and have pass-through taxation to pay taxes in Ukraine.
What if you pass through to UAE as a tax resident of UAE? There is no DTT between US and UAE, is it a case to apply a withholding tax to you by the US?

No, the LLC is not being considered as a separate entity by the US, it is disregarded. It is basically just you and you need to pay all its income tax where you live.

 

[Marzio]

First of all, there is a limitation on your turnover as PE in Ukraine (not income), now it's around $175K which doesn't work for me if you exceed this limit you are no longer 5%.
Secondly, because of war, there are some banks' limitations on spending, for sure they should keep economics alive but it's not safe for doing business

Ok you pay 5% on your turnover as private entrepreneur up to 175K.

What if the turnover is at the LLC level and you pay 5% on LLC profits? Are you still over 175K?

Second thing, how Ukraine sees US LLC?

Is the US LLC seens as a transparent entity or opaque?

If Ukraine sees US LLC as an opaque entity you will pay 5% only up to the profits you decide to pay to yourself and in this case up to 175K.

The remaning you couldretain in US LLC.

Also, you don't have to transfer 175K to Ukraine, you just transfer enough money to pay Ukraine taxes which is 5% of whatever sum you decide to declare.

If instead Ukraine sees the US LLC as a transparent entity you can't retain any earning in your LLC and declare all the LLC profits so you will need a different solution but in any case you will not be able to run a UAE company fro Ukraine.

You will need either to move to UAE or hire at least a director there + renting office space.

 

[jazzybell]

What if the turnover is at the LLC level and you pay 5% on LLC profits? Are you still over 175K?

Do you think it's possible? If you pass taxes to Ukraine, I suppose you have to pay Dividend tax or effective corporate tax which is 18% instead of PE 5%.

Second thing, how Ukraine sees US LLC?

Lately, CFС was announced and this year companies starting to report. If there is no information exchange between Ukraine and US right now, it's just a matter of time.

Is the US LLC seens as a transparent entity or opaque?

If Ukraine sees US LLC as an opaque entity you will pay 5% only up to the profits you decide to pay to yourself and in this case up to 175K.

Can you explain what do you mean by opaque vs transparent and how to know check how Ukraine sees your US LLC?

 

[Marzio]

Can you explain what do you mean by opaque vs transparent and how to know check how Ukraine sees your US LLC?

Every country treats foreign companies differently based on their internal legislation

Take a look at how UK sees some foreign companies.

Transparent = US LLC is seens a a partnership

Opaque = US LLC is seen as a company

 

[Meryem]

Ok you pay 5% on your turnover as private entrepreneur up to 175K.

What if the turnover is at the LLC level and you pay 5% on LLC profits? Are you still over 175K?

Second thing, how Ukraine sees US LLC?

Is the US LLC seens as a transparent entity or opaque?

If Ukraine sees US LLC as an opaque entity you will pay 5% only up to the profits you decide to pay to yourself and in this case up to 175K.

The remaning you couldretain in US LLC.

Also, you don't have to transfer 175K to Ukraine, you just transfer enough money to pay Ukraine taxes which is 5% of whatever sum you decide to declare.

If instead Ukraine sees the US LLC as a transparent entity you can't retain any earning in your LLC and declare all the LLC profits so you will need a different solution but in any case you will not be able to run a UAE company fro Ukraine.

You will need either to move to UAE or hire at least a director there + renting office space.

Hello Marzio, i saw that you are expert in set up a llc in usa, i also have an ecommerce business in UAE and resident in uae as well, i need to set up a usa llc to use it as a gateway provider since its hard to find a gateway rovider in Uae who works properly, in the case i set up usa llc should i pay corporate taxes in all profit which usa company earn or i can decide to transfer them to a business uae account and avoid paying usa taxes

 

[JustAnotherNomad]

US LLC can be taxed as a pass-through entity (taxes are paid as if the owner of the LLC had sent the invoice), or as a corporation (LLC is taxed as an entity of its own).
Best option for you is probably to make the US LLC transparent, then you pay tax where the owner is.
You can use the UAE company as the owner of the LLC, then - for the US tax authorities - it will be the same as if you had sent the invoice from the UAE company. But there is something called Effectively Connected Income (ECI), which is money you make from "doing business in the US". Usually, when you don't work from US soil, it is not ECI. But some people say there could be some hypothetical risk, especially if you sometimes travel to the US etc.
If there is ECI, then there is US tax. And if there is ECI and the LLC is owned by a company (instead of an individual person), then there is something called branch profit tax on top of it.
But there probably won't be any ECI anyway. I'm still mentioning it just in case.
That's the US side.

Then there is the UAE side - no tax (unless something changes), should be good.

But then there is the Ukrainian side. If you were living in a high-tax Western country, your US or UAE company would still have to pay tax where you are. You cannot avoid taxes by simply registering a company in a country without taxes, it's not that simple.
I would assume it's the same in Ukraine - in theory. But probably enforcement is very lax. They have other stuff on there mind, and if you should get caught (unlikely), you could probably just bribe them to let you off the hook?
So in that case, why bother with a UAE company? Just set up a US LLC with yourself as the owner? You can choose a state where your identity doesn't appear on the internet (Wyoming or New Mexico, for example, I think).
Should be good enough?