Please help! US LLC vs Canadian LLP for a Hungarian tax resident?

[gap]

I think as I'm getting into the topic of tax optimization I'm evaluating my situation here in Hungary, which is not too bad. My case: I can't move for the next 4-5 years, I'm currently self-employed with an annual income of 200k-220k USD and 300k in savings, I offer consulting services (digital-product design). My current total tax rate is around 35%. However I would like to attract more serious clients so I would need an entity with a stronger prestige. I'm thinking about US LLC in WY or Canadian LLP in BC. Most of my current clients are from the US.

My goal:
Tbh If I can just take the 9% CIT out of the formula I'm good. I will pay myself a salary slightly above the minimum wage so that I would have no other tax-liability for dividends other than the 15% PIT.

The other thing is that I'm currently working on the productization of my service, so I will need a payment processor in the future.

My questions:
- Can I skip the Hungarian 9% CIT or have tax liability here because the actual place of business-management is located in Hungary?
- I know this is not a lot of money but is it worth thinking about asset protection and build a more complex structure?
- Should I keep my sole proprietorship in Hungary?
- Unfortunately I don't have a partner to partner with so this could be a problem with LLP? How about create a US LLC and make it as a partner in my CA LLP (alongside me as an individual)?
- As a US LLC, can I invoice US clients and retain pass-through status?
- What services would you recommend that would make it easy to set up the company?

I'm also open to any other smart ideas that do not involve moving.

 

[Sols]

I think as I'm getting into the topic of tax optimization I'm evaluating my situation here in Hungary, which is not too bad. My case: I can't move for the next 4-5 years, I'm currently self-employed with an annual income of 200k-220k USD and 300k in savings, I offer consulting services (digital-product design). My current total tax rate is around 35%. However I would like to attract more serious clients so I would need an entity with a stronger prestige.

As long as you aren't incorporated or resident somewhere sketchy or high risk, extremely few clients care. TBH, it's sketchier that a Hungarian person living in Hungary is presenting a Canadian company than a Hungarian company.

My questions:
- Can I skip the Hungarian 9% CIT or have tax liability here because the actual place of business-management is located in Hungary?

No. Your foreign company will be subject to Hungarian corporate tax rules. Then it's just a matter of whether Hungary recognizes your chosen entity as a pass-through entity, i.e. is your US LLC/CA LLP a Kft or Kkt/Bt?

- I know this is not a lot of money but is it worth thinking about asset protection and build a more complex structure?

Asset protection from whom? Under what circumstances? What kind of assets?

- Should I keep my sole proprietorship in Hungary?

Yes, because forming a foreign company is only going to make things worse for you.

- Unfortunately I don't have a partner to partner with so this could be a problem with LLP? How about create a US LLC and make it as a partner in my CA LLP (alongside me as an individual)?

Yes, you can have another company as a partner and you can be the sole owner of that other company. Of course, banks might think this is a little strange when you try to open bank accounts for the LLC or LLP.

- As a US LLC, can I invoice US clients and retain pass-through status?

Yes.

I'm also open to any other smart ideas that do not involve moving.

Consider changing nothing. Don't mess this up. At 220,000 USD/year in income, you are high enough in the income/wealth bracket in Hungary that you're more likely than the average person to be investigated if the tax office catches wind of anything.

If you are a Hungarian citizen, even leaving Hungary doesn't change your personal tax situation. Hungary taxes its citizens even after they leave Hungary.

 

[Marzio]

Hungary taxes its citizens even after they leave Hungary.

Unless he becomes tax resident in a country with a DTT with HU.

 

[gap]

No. Your foreign company will be subject to Hungarian corporate tax rules. Then it's just a matter of whether Hungary recognizes your chosen entity as a pass-through entity, i.e. is your US LLC/CA LLP a Kft or Kkt/Bt?

Sorry but I'm confused, if the US LLC is a pass-through entity then its income will be included in my personal tax return, right? 15% personal income tax and 13% social contribution tax, no 9% CIT.
Or I can do anything as long as I live here I have to pay corporate tax at the company level because the tax authorities treat my "entities" as KFTs?

 

[Sols]

Sorry but I'm confused, if the US LLC is a pass-through entity then its income will be included in my personal tax return, right? 15% personal income tax and 13% social contribution tax, no 9% CIT.
Or I can do anything as long as I live here I have to pay corporate tax at the company level because the tax authorities treat my "entities" as KFTs?

A US LLC is a pass-through in the US. What does Hungarian law say about it? For example, in Canada, US LLCs are not considered pass-through entities. If you live in Canada and operate a US LLC, the LLC has to pay corporate income tax in Canada.

Some countries accept US LLCs as pass-through, some consider them taxable entities, and many haven't had a reason to make a decision yet, making it uncertain what would happen.

 

[gap]

Yes, because forming a foreign company is only going to make things worse for you.

I understand what you're saying but unfortunately I have to do something because from 2024 there will be no double taxation treaty between Hungary and the US, I think this will affect my current operations 90% of my clients are from the US. But I'm not sure, maybe as a sole proprietor it doesn't affect me. I will talk to a tax advisor, but do you know anything about this?

 

[JustAnotherNomad]

If you have US clients, you risk US taxes with a US LLC. It might be better to use a non-US company. But like @Sols said, you'd have to check how Hungary treats such a setup.
Do you need all that money? Why don't you pay the 9% CIT and keep the money in the company? You'd only pay tax on what you pay out. And paying dividends instead of a salary (or a mix of both) might lower your taxes, too. I'd start by talking to a Hungarian tax advisor. I'm sure there are ways to lower your tax rate.
Then you could consider adding something like a Canadian LP - but why? Hungary has good reputation, it's where you're located, what's the problem?

 

[Sols]

I understand what you're saying but unfortunately I have to do something because from 2024 there will be no double taxation treaty between Hungary and the US, I think this will affect my current operations 90% of my clients are from the US. But I'm not sure, maybe as a sole proprietor it doesn't affect me. I will talk to a tax advisor, but do you know anything about this?

How are you currently benefitting from the tax treaty?

Generally speaking, I don't see how the absence of a double taxation treaty would adversely affect your situation where you invoice US clients as a Hungarian sole proprietor or as a Hungarian company.

Adding a US LLC just seems like an unnecessary complication with no benefits.