One of the many advantages you’ll often hear cited in favor of starting a US LLC is the simple tax treatment. While this is certainly a benefit of an LLC when you compare taxation of foreign-owned LLCs with that of a C-Corporation, there is still a bit of a quagmire in terms of US tax laws. Not to mention the rather grey area of what is covered and not covered by certain terms and provisions of the Double Taxation Treaty between the US and Ukraine.
For the vast majority of businesses, taxes for American LLCs with Ukrainian owners are quite straightforward.
Why? Because, simply put, in most cases you will not owe U.S. taxes.
We’ll take a look a bit later at a few examples of where that would not be the case, but for most intents and purposes, you will pay taxes in Ukraine, not the United States. Although you will still have filing requirements [link].
Without getting into the nitty gritty of US tax legislation, LLC’s themselves are actually not taxed – only the individual members are taxed on the individual income they withdraw from the LLC. This type of tax setup - where the members of the company rather than the company itself pay - is called pass-through taxation. In the case of Ukrainian-owned businesses, this means that Ukrainian members of the LLC will file and pay any taxes due on income in Ukraine, and not the US.
There are two Standard LLC Structures – Single and Multi-Member. Which one you own will not change the overall tax burden, but does have some effect on how the IRS classifies and looks at your LLC.
The IRS treats a single-member LLC (an LLC with just one member) whether foreign or domestic, as a disregarded entity - which basically means that in the IRS’s eyes the entity is transparent for tax purpose. In other words, the IRS looks past, or “disregards,” the company and instead looks through it to the sole owner. This is essentially the same way the IRS would treat a sole proprietor (an American “FOP”), or the way the Ukrainian tax service for example would treat a FOP.
In other words, any income received by the LLC is thought of as being received directly by you, the owner. Same with expenses.
Excepting for those cases where the LLC has elected to be treated as a Corporation (which is a quite complex situation that would take far more than one article to cover!), the IRS treats and taxes multiple member LLCs as “partnerships.”
Just as with the single member LLC, the LLC does not pay any taxes – the members declare their share of income, gains, losses, deductions, etc from the LLC on their own individual tax returns.
Importantly, since Ukraine has a Double Taxation Treaty with the United States, you’re in luck. Unless you have hired a directly dependent agent to operate your US LLC (the Treaty lists a number of criteria, but basically, if this person does not have contract-signing and other powers, they are not a dependent agent of your company), and unless you have a “permanent establishment” (which we will define below), you’re exempt from paying taxes on US-source income for your LLC.
There are a number of factors that need to be considered to determine whether you have a business connected with the US and a permanent establishment. The IRS roughly defines a permanent establishment as a fixed and continuing place of business inside the US through which your LLCs conducts business.
Think something like a store, office, factory, or a mine. Having full-time dedicated staff can also make you qualify as a permanent establishment in some cases.
In short, Ukrainian owners for most US-based LLCs will pay taxes in Ukraine, and only be required to file informational returns (federal) and an annual report (state) to let the United States tax authorities see that the business is not avoiding taxes it might owe.
Now, let’s look at the minority (in our experience at least) of cases where you do have a permanent establishment in the US. You may have also elected to have your LLC treated as a C-Corporation, which is a very specific case.
If you have a single member LLC you’ll report all income and losses on the 1040NR (non-resident) to calculate whether you owe any tax. If you do, you’ll need to pay the IRS.
The situation becomes a little more complex if you’re a foreign member/owner in a multiple member LLC. If your LLC had any income effectively connected with a U.S. trade or business, the LLC is required to withhold and pay (on a quarterly basis) any taxes on your (the foreign partner’s) income – 37% for individuals and 21% for corporate partners. For income that is not effectively connected to the US the rate is a flat rate of 30%. The IRS has a long list of what is considered “effectively connected” and what is not [here.]
On the other hand if you have business expenses and losses you may be able to reduce your tax liability!
As you can see, using the example of a Ukrainian owner of a US LLC, in most cases your tax burden will be limited to paying personal income taxes in Ukraine. There are some rare cases however where you might need to pay U.S. Federal individual income taxes.
We can work with you to identify where you might have a need to pay, how to properly structure to take advantage of the US Ukraine Double Tax treaty, and to make sure you’re in compliance with all reporting and tax requirements. For more information, contact us today!