US LLC + Cyprus residency

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JustAnotherNomad

Entrepreneur
Does anyone have experience with US LLCs (disregarded entities) and Cyprus residency? (I assume the LLC would have to be owned by a Cypriot company for this to work.)
Or is there a catch?
 

fshore

Entrepreneur
In many countries a us llc is considered a separate entity and not disregarded for taxes. I’m not sure how Cyprus classifies a us llc, so that is worth checking. Disregarded status is a IRS way of viewing it and not directly related to the company that is formed at the state level.
 

Sols

Staff member
Mentor Group Gold
What are you trying to achieve exactly?

The Cyprus tax authority almost never goes after well behaved foreigners but you might sleep better at night if you set up a structure that's fully compliant, rather than rely on lack of enforcement.
 

JustAnotherNomad

Entrepreneur
My idea was to have income from the US LLC classified as a tax-free dividend, although the LLC would be tax-transparent from the US side.
But it seems like you will always pay tax on sales to US clients (even without US presence/nexus) if the LLC is owned by a corporate entity.
And I guess without that, it doesn’t work from the Cyprus side...
 

Sols

Staff member
Mentor Group Gold
Income from an LLC is not dividends, so you would be looking at personal income tax in Cyprus. In reality, this is almost never checked by the tax office but it is probably not compliant. One way around this would be to have the LLC opt to be taxed as a corporation, in which case you're looking at a different tax structure (US corporate tax, relief under DTA, and then dividends).

But for anyone living in Cyprus, I'd almost always recommend forming a Cypriot company. It's not the cheapest and it's not zero tax, but it's one of the best structures you can have today within the EU. You get to sleep at night knowing your structure is compliant and sustainable.
 

JustAnotherNomad

Entrepreneur
I was hoping that Cyprus might still classify the income as dividends, even though the LLC is tax transparent.
Can you have a US corporation that doesn’t pay corporate income tax in the US per the DTA? I thought you always have to pay tax in the US first with a corporation (of course you can reduce profits using deductions and salaries - but then there’s US payroll tax etc.).
Or at least you would be paying tax on sales to US clients?

Actually I’m strongly inclined now to just go for UAE residency with a US LLC. I like Dubai much better than Cyprus. I was only hesitant because free zone companies are so expensive. But it seems like you can just get a freelance visa instead, which is much cheaper.
 

fshore

Entrepreneur
My idea was to have income from the US LLC classified as a tax-free dividend, although the LLC would be tax-transparent from the US side.
But it seems like you will always pay tax on sales to US clients (even without US presence/nexus) if the LLC is owned by a corporate entity.
And I guess without that, it doesn’t work from the Cyprus side...
You pay the same taxes to the us that you would have without the llc. If the foreign company would pay tax on those sales then you will also pay tax on the sales when selling through the llc.
 

Sols

Staff member
Mentor Group Gold
A us llc can pay dividends, it all depends on how Cyprus will regard the income.
How irs in the us regards the income and the llc doesn’t necessarily relate to how other countries regards the company.
Not sure why you cut my quote off right before I clarified exactly that.
 

fshore

Entrepreneur
Not sure why you cut my quote off right before I clarified exactly that.
I think we all use these treads for general information, not always just related to the specific case in question.
Thats why I pointed out that there is nothing with a llc that says it can't pay dividends.
 

gnud

Entrepreneur
I am curious what you are trying to achieve with this structure

Obviously he's trying to not to pay taxes at all, thinking just because the LLC is transparent and non-ETBUS in the US and Cyprus doesn't tax non-dom dividends he can achieve a nett 0% tax.

The reason why it won't work is because by running it from Cyprus he's creating there a permanent establishment of the LLC, and is therefore liable to corporate taxation in Cyprus. Moreover it no longer falls under the non-dom regime, since it's local. On the form 5472 its ownership, assets and transactions are reported to the IRS which will pass it on to the Cypriot authorities.

An US LLC is probably only usable as a part of a tax optimization structure when you run it from the UAE.
 

Wanderien

New member
Income from an LLC is not dividends, so you would be looking at personal income tax in Cyprus. In reality, this is almost never checked by the tax office but it is probably not compliant. One way around this would be to have the LLC opt to be taxed as a corporation, in which case you're looking at a different tax structure (US corporate tax, relief under DTA, and then dividends).

But for anyone living in Cyprus, I'd almost always recommend forming a Cypriot company. It's not the cheapest and it's not zero tax, but it's one of the best structures you can have today within the EU. You get to sleep at night knowing your structure is compliant and sustainable.
I think you're the one understanding it correctly, and indeed an LLC does not pay out dividends. The IRS disregards a single-member LLC for tax purposes, so the profits from the LLC get taxed straight into the income tax in the country where the owner of the LLC is a resident.

As you also pointed out correctly, one would need to elect their LLC to be taxed as a C-Corp to be able to pay out dividends and a salary or management fee to yourself or several owners. The downside of this is that you'd then get the 21% corp. tax in the US, but I guess there are some ways to reinvest a lot of the profits or pay yourself a hefty management fee so that there are fewer profits for the corp. Then the company can pay out dividends to the owner(s) and when you're in Cyprus there's a beneficial double-taxation treaty with the US.

Do you think this is a good idea, or better to also have a Cyprus holding company which own the US LLC?
This obviously would mean more costs and upkeep... Do the benefits outweigh the hassle & extra cost?
 

gnud

Entrepreneur
I think you're the one understanding it correctly, and indeed an LLC does not pay out dividends. The IRS disregards a single-member LLC for tax purposes, so the profits from the LLC get taxed straight into the income tax in the country where the owner of the LLC is a resident.

That depends on the tax treaty and on the local tax authority. Some treat it as income, some as dividends. Some treat an LLC as a tax-transparent entity, some treat it as a company.
 

CyprusLaw

Mentor Group Gold
Obviously he's trying to not to pay taxes at all, thinking just because the LLC is transparent and non-ETBUS in the US and Cyprus doesn't tax non-dom dividends he can achieve a nett 0% tax.

The reason why it won't work is because by running it from Cyprus he's creating there a permanent establishment of the LLC, and is therefore liable to corporate taxation in Cyprus. Moreover it no longer falls under the non-dom regime, since it's local. On the form 5472 its ownership, assets and transactions are reported to the IRS which will pass it on to the Cypriot authorities.

An US LLC is probably only usable as a part of a tax optimization structure when you run it from the UAE.
The non dom has to do with the individual, a non dom individual that relocates to Cyprus maintains the non dom status for 17 years even though he is living in Cyprus
 

fshore

Entrepreneur
I think you're the one understanding it correctly, and indeed an LLC does not pay out dividends. The IRS disregards a single-member LLC for tax purposes, so the profits from the LLC get taxed straight into the income tax in the country where the owner of the LLC is a resident.

As you also pointed out correctly, one would need to elect their LLC to be taxed as a C-Corp to be able to pay out dividends and a salary or management fee to yourself or several owners. The downside of this is that you'd then get the 21% corp. tax in the US, but I guess there are some ways to reinvest a lot of the profits or pay yourself a hefty management fee so that there are fewer profits for the corp. Then the company can pay out dividends to the owner(s) and when you're in Cyprus there's a beneficial double-taxation treaty with the US.

Do you think this is a good idea, or better to also have a Cyprus holding company which own the US LLC?
This obviously would mean more costs and upkeep... Do the benefits outweigh the hassle & extra cost?
In IRS view a llc doesn't pay out dividends. However a llc can pay out dividends in another country's view. I'm not sure how cyrpus views it.
 

scrawnycrewmate

New member
Do you think this is a good idea, or better to also have a Cyprus holding company which own the US LLC?
This obviously would mean more costs and upkeep... Do the benefits outweigh the hassle & extra cost?

I've been having the same thoughts, an example setup for a company buying from US wholesalers to sell to US customers through FBA would be:

- Single-Member US LLC
- Single member of the US LLC is the CY LTD holding (with PE in Cyprus)
- The US LLC is ETBUS, and the income is US Source...
- ...But the Tax Treaty between US and CY has PE clauses, which override ETBUS (US LLC has no PE in US)
- So the US LLC does not pay taxes in the US
- And since the US LLC pays untaxed profit distributions to the CY LTD holding...

...Because it's untaxed profit, it cannot be considered dividend. Dividends are paid after corporate tax. Cyprus would logically see this as income (not dividends) for the CY LTD holding, to be taxed as 12.5%.

Is it worth it? In my opinion it is, provided the many transactions incurred by FBA do not incur a commensurate increase in bookkeeping costs on the US side. On the CY side, there are only the untaxed profit distribution transactions to worry about, a handful per year, instead of the FBA 100s.

On the form 5472 its ownership, assets and transactions are reported to the IRS which will pass it on to the Cypriot authorities.
That makes sense, then all the pre-tax profit distributions are reportable transactions reported to the IRS, and the IRS tells Cyprus, and Cyprus will expect taxes to be payed on those.
 

fshore

Entrepreneur
I've been having the same thoughts, an example setup for a company buying from US wholesalers to sell to US customers through FBA would be:

- Single-Member US LLC
- Single member of the US LLC is the CY LTD holding (with PE in Cyprus)
- The US LLC is ETBUS, and the income is US Source...
- ...But the Tax Treaty between US and CY has PE clauses, which override ETBUS (US LLC has no PE in US)
- So the US LLC does not pay taxes in the US
- And since the US LLC pays untaxed profit distributions to the CY LTD holding...

...Because it's untaxed profit, it cannot be considered dividend. Dividends are paid after corporate tax. Cyprus would logically see this as income (not dividends) for the CY LTD holding, to be taxed as 12.5%.

Is it worth it? In my opinion it is, provided the many transactions incurred by FBA do not incur a commensurate increase in bookkeeping costs on the US side. On the CY side, there are only the untaxed profit distribution transactions to worry about, a handful per year, instead of the FBA 100s.


That makes sense, then all the pre-tax profit distributions are reportable transactions reported to the IRS, and the IRS tells Cyprus, and Cyprus will expect taxes to be payed on those.
Untaxed doesn't necessarily mean that Cyprus doesn't consider it as dividends.
And btw, this doesn't sound like etbus (no people or dependent agent in the US).
 

CyprusLaw

Mentor Group Gold
Untaxed doesn't necessarily mean that Cyprus doesn't consider it as dividends.
And btw, this doesn't sound like etbus (no people or dependent agent in the US).
In Cyprus US LLC payments are deemed as follows:

- if the US LLC is subject itself to corporation tax in its resident country then it is considered as a corporation for Cyprus tax purposes and therefore payments to the Cyprus shareholder would be deemed as dividends; whilst
- if the US LLC is not subject to corporation tax in its resident country then the income deriving from such the US LLC is considered as income for Cyprus tax purposes
 

fshore

Entrepreneur
In Cyprus US LLC payments are deemed as follows:

- if the US LLC is subject itself to corporation tax in its resident country then it is considered as a corporation for Cyprus tax purposes and therefore payments to the Cyprus shareholder would be deemed as dividends; whilst
- if the US LLC is not subject to corporation tax in its resident country then the income deriving from such the US LLC is considered as income for Cyprus tax purposes
OK good to know. Does this also apply to BVI etc, that income is taxable in Cyprus if not in BVI?
 
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