0

Say I am a citizen of Malaysia.

I am thinking of either opening a corporation in Seychelles or Delaware LLC.

As far as I know, both are tax free, cheap, and stuff. Delaware LLC is even cheaper.

Delaware LLC, for tax purpose, is a tax "flow" entities. So if you're an american citizen, you will pay tax as if the income of the LLC is your income.

But what about if you are a citizen in other country? From say, Malaysian's point of view, is delaware LLC any different than Seychelles corporation? Both are just foreign entities right?

Must you pay tax for any income the delaware LLC have? Assuming you don't repatriate, etc.

Note: LLC is a flow through entities. Basically if I were american citizen the tax will flow through as if I don't have LLC. However, given that I am not an american citizen the tax will flow through a foreign entity. From US/Delaware points of view, the tax flow through outside. From my country points of view, an LLC in delaware owns tax. So no body claims they can tax me.

That's the idea.

  • FYI, the default rule under U.S. law is that foreign LLCs are taxed as C-corporations not as pass through entities. – ohwilleke Jul 1 at 19:18
  • 2
    I’d really recommend a hard look at what the Malaysian tax office thinks of that. – gnasher729 Jul 3 at 15:16
  • 2
    To follow up on @ohwilleke's comment: LLC is not inherently a flow through entity. A corporation's form of organization does not uniquely determine its tax treatment. There is no form of organization that guarantees flow through treatment. In particular, if any of a corporation's shareholders is a nonresident alien, the corporation may not be treated as a flow through entity. This is true whether the corporation is an LLC or has any other form of organization. – phoog Oct 31 at 13:30
2

Can people use an LLC in Delaware to legally avoid tax in his home country?

Probably not. The home country would at least tax the income from owning the Delaware LLC as investment income.

In any event, the cost of that avoidance will be paying corporate income tax in the US.

Delaware LLC, for tax purpose, is a tax "flow" entity.

This is incorrect. See the IRS page on S corporations:

S corporations are corporations that elect to pass corporate income, losses, deductions, and credits through to their shareholders for federal tax purposes. Shareholders of S corporations report the flow-through of income and losses on their personal tax returns and are assessed tax at their individual income tax rates. This allows S corporations to avoid double taxation on the corporate income. S corporations are responsible for tax on certain built-in gains and passive income at the entity level.

To qualify for S corporation status, the corporation must meet the following requirements:

  • Be a domestic corporation
  • Have only allowable shareholders
    • May be individuals, certain trusts, and estates and
    • May not be partnerships, corporations or non-resident alien shareholders
  • Have no more than 100 shareholders
  • Have only one class of stock
  • Not be an ineligible corporation (i.e. certain financial institutions, insurance companies, and domestic international sales corporations).

In order to become an S corporation, the corporation must submit Form 2553 Election by a Small Business Corporation (PDF) signed by all the shareholders. See the Instructions for Form 2553 (PDF) for all required information and to determine where to file the form.

As you see pass through treatment is never automatic, and it is not available at all if any shareholder is a nonresident alien.

Therefore:

But what about if you are a citizen in other country?

In that case the Delaware LLC will owe US federal income tax on its income.

  • 1
    FWIW, the restrictions on access to flow through treatment as an S-corporation are more strict than those on electing partnership tax treatment under Subchapter K for an eligible entity (such as an LLC which is usually taxed under Subchapter K and not Subchapter S). There is not a general prohibition on non-citizen owners of LLCs receiving pass through tax treatment, but there are a variety of special tax rules that apply to partnerships with foreign partners. – ohwilleke Oct 31 at 19:56
3

First of all, if your Delaware LLC earns money, you will pay tax in America on that money. America still taxes "foreigners" on American income, just not on"global" income. That is, unless the U.S. has a tax reciprocity treaty with your home country, Malaysia.

I don't know about Malaysian law, but I am writing as an American about American law regarding the Seychelles (and I am not a lawyer). The following is only as an "example."

If you set up an LLC in the Seychelles, you could, in theory, avoid American tax by accruing income there. In practice, if you did nothing but "banking" in the Seychelles, America would look at your lack of "value added" there, and could tax you on Seychelles income as if your corporation was American.

The way to make such a claim stick (typically in a place like Ireland), is to set up a manufacturing or operating facility (e.g. call center) there so that you were shipping goods or services from your offshore operation. Then you'd have a strong claim in America that your operation actually earned most of its income abroad, and the U.S. company was just a holding company.

  • But if I am not an american citizen and I have a company in Seychelles all will be up right? Actually, are you at a tax lawyer? I am pretty sure you don't have to set up manufacturing there. I've heard that the money in that seyschelles company cannot be owned by less than 5 American citizen. Look that up again – user4951 Jul 3 at 17:15
  • @user4951: I AM NOT A LAWYER and can say no more than what I've already said. – Libra Jul 3 at 17:35
  • LLC is a flow through entities. Basically if I were american citizen the tax will flow through as if I don't have LLC. However, given that I am not an american citizen the tax will flow through a foreign entity. From US/Delaware points of view, the tax flow through outside. From my country points of view, an LLC in delaware owns tax. So no body claims they can tax me. That's the idea. – user4951 Oct 31 at 1:06
  • @user4951 have a look at the IRS rules governing S and C corporations. The treatment of a given corporation is not determined by its form of organization. – phoog Oct 31 at 13:26

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.