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US LLC + territorial tax

maritusa

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Oct 8, 2023
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I see many people recommending a setup where you have a US LLC + live in a territorial tax country and then pay 0% tax while getting all the benefits of having an American company. But where exactly would that be?

It's easy to find a list of these territorial tax countries but it seems like with almost all of them if your work is performed in the given country even though you don't have an office and work online for a foreign client from home the income is still considered local sourced. The only income that really seems to be foreign-sourced is passive income. On top of that, you would often trigger Permanent Establishment rules.

Do people just recommend these setups while being completely unaware of this or do they think the risk of getting caught is so low that it doesn't matter in practice?

Is there even a single country where a setup like this is 100% legit?
 
It's easy to find a list of these territorial tax countries but it seems like with almost all of them if your work is performed in the given country even though you don't have an office and work online for a foreign client from home the income is still considered local sourced. The only income that really seems to be foreign-sourced is passive income. On top of that, you would often trigger Permanent Establishment rules.
You're applying western/high-tax country thinking to places where that mentality doesn't exist. No one cares in places like Costa Rica, Panama, Dominican Republic, Uruguay. Don't make a fuss. Don't ask questions. Don't get asked questions.

It's not even entirely clear cut that what you write would or even could happen if someone suddenly started to care.

There's an argument to be made that a US LLC might be a suboptimal entity — in some cases. Dividends can look/work better than personal income.

If you want to be a really good upstanding resident, form a local company, hire a couple of locals, and have them be your customer service team or whatever. Pay tax on that and provide jobs. You can add value to society without paying tax on your foreign income.
 
You're applying western/high-tax country thinking to places where that mentality doesn't exist. No one cares in places like Costa Rica, Panama, Dominican Republic, Uruguay. Don't make a fuss. Don't ask questions. Don't get asked questions.

It's not even entirely clear cut that what you write would or even could happen if someone suddenly started to care.

There's an argument to be made that a US LLC might be a suboptimal entity — in some cases. Dividends can look/work better than personal income.

If you want to be a really good upstanding resident, form a local company, hire a couple of locals, and have them be your customer service team or whatever. Pay tax on that and provide jobs. You can add value to society without paying tax on your foreign income.
People assume the laws are clear, and if the law says A of course A is applied. Yes, this would be the case in Germany, (or the Netherlands or Denmark), but most of the world doesn't operate like Germany. It's a classic fallacy to think so.
In most Latam countries the law/rules about local sourced income are not clear - if you ask different lawyers/tax experts you will get different answers, and remember that there is money in it for them to scare you and make you need their services, and no money in telling you it's all good, dont worry.

Then you have the application of the law, which is the important thing in most of the world, and in practice a one-man-with-a-laptop business registered abroad is just not going to be taxed in Latam territorial tax countries. Sure, this application of the law could change sometime in the future, you got to keep track of what's happing in the Latam country you are in.

And about places where a setup with a US LLC and zero tax is 100% legit. Well, the UAE before they introduced the 9% tax. You have Palau, and other pacific islands, Bahrain (but they probably will introduce corp tax like the UAE), the Caribbean zero tax islands. But it's the wrong question, in much of the world there is no clear cut difference between legit and non legit.

An example Ive shared before:

A friend of mine in a West African country (with worldwide taxation on paper) was working remotely for an Italian company. He naively initially went to the local tax office to declare his foreign income. The tax officials thought that this guy must be really stupid, but agreed that he would pay 10% of his foreign income, which they probably took directly in their own pockets. According to official law foreign income should be treated like local income and actually taxed at about 36%, but the local tax office were either not aware of this or chose not to implement it.
Then 3 years later, the local tax office came up with some obviously bogus excuse that he had filled in some paper incorrectly and was due to pay a lump sum additional tax of the equivalent in local currency of 23,000 EUR. Note that this amount or the reasoning behind it had nothing to do with the law or the actual about 36% rate.
After long negotiations and including quite a bit of swearing in Italian (it makes an impression on African officials), he managed to negotiate down the 23k EUR to a mere 230 EUR. After that he wisened up and never declared any foreign income again, and havent had any problems since.
 
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