Question US LLC (disregarded entity) with a foreign company owner - is it possible?

[Trashy]

Hello,

What I'm planning on doing is starting a Romanian company (utilizing the 1/3% micro-company tax there). I'm a software developer, and the company would have two main types of income: 1) freelance work, 2) advertisement income/sale of digital products. For the foreseeable future, I would stay below the EUR 1 million turnover. Of course, I could do both types of business as the newly-formed Romanian company, but for not tax related reasons, I would prefer to do business as a UI company. These reasons include the 1st Amendment, Section 230, reputation of the jurisdiction, etc. I have done some prior research, but I wanted to ask you, guys.

So, my questions are:

1. Can a foreign company, in this case, a Romanian, be an owner of a US-registered single-member LLC, that is a disregarded entity?
2. If so, would the US LLC be subjected to any kind of taxes in the US? Due to ad revenue from Google, in-app purchase revenue from Apple, etc.
3. Is it viable? I mean, are there such caveats that make the whole thing hard to implement or simply unfeasible? I know this is pretty subjective.

Thank you! If something is not clear, feel free to ask a follow up question.

 

[Sols]

1. Can a foreign company, in this case, a Romanian, be an owner of a US-registered single-member LLC, that is a disregarded entity?
2. If so, would the US LLC be subjected to any kind of taxes in the US? Due to ad revenue from Google, in-app purchase revenue from Apple, etc.
3. Is it viable? I mean, are there such caveats that make the whole thing hard to implement or simply unfeasible? I know this is pretty subjective.

Thank you! If something is not clear, feel free to ask a follow up question.

1. Yes.
2. Usually not, but don't take tax advice from random people on the internet. Speak with a tax adviser. Your main headache is Effectively Connected Income (ECI) but it's almost never a problem for the type of business you describe.
3. The US LLC becomes tax resident in Romania under Romanian law (if that's where you live) and has to comply with Romanian law, meaning you might end up paying double tax unless you can through some accounting wizardry find a way around that.

 

[Trashy]

1. Yes.
2. Usually not, but don't take tax advice from random people on the internet. Speak with a tax adviser. Your main headache is Effectively Connected Income (ECI) but it's almost never a problem for the type of business you describe.
3. The US LLC becomes tax resident in Romania under Romanian law (if that's where you live) and has to comply with Romanian law, meaning you might end up paying double tax unless you can through some accounting wizardry find a way around that.

Thanks for the reply. The 3rd point is a bit concerning. Is there a way I can enjoy the benefits of a US LLC while paying taxes in Romania, or is it fairy tale territory? I'm a (tax) resident of Hungary, to further complicate the matter.

 

[Sols]

In that case, both companies become tax resident in Hungary and need to comply with Hungarian tax law.

 

[Trashy]

In that case, both companies become tax resident in Hungary and need to comply with Hungarian tax law.

Hungary has a double tax agreement with Romania. I'm certain the Romanian company wouldn't be subjected to Hungarian corporate tax. However, I’d only be required to pay income taxes after dividends, deducting the amount (at the rate of 5%) payable in Romania. Which is fine, for the time being, as I can always relocate if my business becomes successful.

The only question here is how Romania and Hungary would treat the LLC, but I guess only a tax specialist can give me a definitive answer to that.

 

[Sols]

Hungary has a double tax agreement with Romania. I'm certain the Romanian company wouldn't be subjected to Hungarian corporate tax. However, I’d only be required to pay income taxes after dividends, deducting the amount (at the rate of 5%) payable in Romania. Which is fine, for the time being, as I can always relocate if my business becomes successful.

Those are dangerous assumptions to make without having spoken with a tax adviser. I hope you know what you're doing.

The only question here is how Romania and Hungary would treat the LLC, but I guess only a tax specialist can give me a definitive answer to that.

Yes, and make sure you cover the Hungary/Romania question as well. It's worth the extra investment to make sure your structure is sound.

 

[JustAnotherNomad]

Hungary has a double tax agreement with Romania. I'm certain the Romanian company wouldn't be subjected to Hungarian corporate tax.

You are wrong if you manage the company from Hungary. It will be tax resident in Hungary.

With the US LLC, you’d have to make sure there will be no branch office tax.
If you absolutely want to use a US entity, you might be better off with a US corporation that would act as a sales company. But you’d have to set the agreements up properly to be in line with transfer pricing restrictions. And American lawyers are expensive.

 

[Eintagsfliege]

I can only second the post above. If your US LLC is owned by a foreign company the US LLC is considered a branch. You will have to pay US tax PLUS a branch tax of 30%. You will be much better with a US corporation.

 

[JustAnotherNomad]

Those are dangerous assumptions to make without having spoken with a tax adviser. I hope you know what you're doing.

@Sols , I just have to say I admire people like you who seem to be able to stay calm, diplomatic and respectful in any situation. My temper gets the better of me sometimes.

 

[Trashy]

@Sols , I just have to say I admire people like you who seem to be able to stay calm, diplomatic and respectful in any situation. My temper gets the better of me sometimes.

Haha, indeed. Thanks, guys. It seems that my dream setup didn't pass the trial of, well, reality. I'll look into US companies without a company owner.

 

[ElBotellon]

I can only second the post above. If your US LLC is owned by a foreign company the US LLC is considered a branch. You will have to pay US tax PLUS a branch tax of 30%. You will be much better with a US corporation.

why it should be a branch if there is no PE and a DTA among the two countries?

 

[startfleetio]

why it should be a branch if there is no PE and a DTA among the two countries?

only if the LLC is ETBUS and has US source income, then only the branch profits tax will apply.