Most financial experts agree that the United States is a primary location for international business. The presence of good banks, advanced infrastructure, a consistent legal system and a stable government are all characteristics of the United States that are taken for granted.
However, many people do not realize the enormous tax benefits given to "non-resident aliens" making passive income in the United States, or earning income outside the United States and simply using the USA as their own personal "offshore tax haven."
The United States does not tax non-resident aliens for most interest income or dividend income derived from the United States. There is zero capital gains on profits from investments for non-resident aliens. There is zero tax on income earned outside the USA. Only active United States derived income is taxed. Also, various tax treaties give a United States company certain tax advantages when doing business outside the USA.
The Definition of "Resident"
One of the most important issues is that of maintaining a "non-resident" status. Unfortunately many people confuse the immigration definition of resident with the tax definition of resident.
Under the immigration laws of the United States, a resident is only someone who has been given a permanent residence visa. But under the tax laws a resident can also be someone who has maintained a "substantial presence" in the United States regardless of immigration status.
There is a formula that determines when someone meets the "substantial presence" test based upon the number of days they have been present in the United States for a given year and the two prior years. To be safe, the non-resident should stay in the United States no more than 182 days in any given year.
The "Pass Through" or "Disregarded" Tax Entity
The best way for a non-resident alien to take advantage of these tax benefits is to use the a “pass through” or “disregarded” entity. Two such entities which I like to use are the United Kingdom Limited Partnership (UK LP) and the US Limited Liability Company (US LLC).
A UK LP is a partnership that has been properly structured to provide limited liability protection to the limited partners, is managed by general partner, and has been properly registered with the UK registrar.
A US LLC is an entity that has the same limited liability characteristics as a corporation, but the ease of management characteristics of a partnership.
If properly structured, the US Internal Revenue Service and the UK HM Revenue and Customs view the UK LP and the US LLC as "disregarded" tax entities which means that the respective taxing authority disregards the existence of the entity and treats the income as if it were earned by the members, partners or shareholders.
In the case of the UK LP the income from the partnership is attributed to the partners without the need to file a partnership return in the UK. If the partners are not in the UK and the income is not derived from UK business, there will be no UK taxes and thereby no returns that need to be filed. If the UK LP has a bank account in the United States but otherwise does not do business in the United States of America there will be no need for the UK LP to file any tax returns in US unless it earns active income derived from U.S. Source income.
In the case of the US LLC if there are two or more members of the US LLC, then it is treated as a partnership and must file a partnership tax return.
But if it has only one member who is an individual then it is treated as a sole proprietorship. For a non-resident alien who is the sole member, this means that the US LLC is disregarded by the I.R.S. and income of the company is taxed at the more beneficial non-resident rates.
In fact unless it earns active income derived from U.S. source income there is no reason for the US LLC or the non-resident to even file a Federal tax return.
Yet for all other purposes the US LLC will be treated as a "domestic" entity. As far as banks and other parties are concerned, the US LLC is a US domestic entity.
There are many states in which you can form an LLC, but I currently suggest the use of a Delaware LLC. Delaware has traditionally been the jurisdiction of choice due to the fact that Delaware case law is more mature and developed. However, in recent years, Delaware has further improved upon this advantage with aggressive statutory implementation that clearly and decisively makes Delaware the best US jurisdiction for company formation.
How can a UK LP or a US LLC Help You?
There are a lot of ways a non-resident alien can benefit by using a UK LP or US LLC:
Simple Yet Flexible Solutions
When setting up the UK LP or the US LLC there are many ways to structure the entity to maximize asset protection, legal tax reduction, and privacy.
The UK LP can be a slightly more complicated entity to structure simply because there must be more than one party/owner to the entity, otherwise it would not be a partnership.
Perhaps the simplest way to set up a UK LP is to name yourself as the Limited Partner with a 100% interest in the UK LP but zero voting rights and operational rights, and then obtain a nominee to act as General Partner. Using a nominee General Partner will make it easier to open bank accounts in the USA, but you still retain control over the entity since as Limited Partner you can replace the nominee General Partner whenever you wish.
To give yourself greater privacy and improved tax treatment you may want to establish an International Privacy Trust to be a Limited Partner with 99% ownership of the UK LP and then you would maintain a 1% Limited Partnership interest. If there are more than one partner each partner should have their own Trust, although this is not absolutely necessary.
Using a nominee General Partner has some real advantages in regards to simplicity, but there are some disadvantages. To provide greater privacy, security and asset protection, I suggest that the client consider obtaining their own US LLC to act as the General Partner of the UK LP. With a US LLC acting as General Partner and an International Trust acting as Limited Partner the UK LP can provide tremendous asset protection and privacy benefits to the client.
For the US LLC, in order to maintain the “disregarded” tax treatment there can be only one owner. The easiest way to do this is to name the client as the sole owner. There are many advantages to being named as the sole owner, but privacy may not be one of them. Also, as the sole owner of the US LLC you may be legally required to declare and/or pay taxes on the income of the US LLC in your home country.
To provide greater privacy, asset protection, and better tax treatment, I suggest that the client obtain an International Privacy Trust to own the US LLC. In this case the Trust will be listed as the owner of the company, not the client, and if the Trust is properly structured the client may be able to legally avoid paying taxes on the income earned by the US LLC and the Trust in his home country.
Please feel free to contact us if you would like to discuss these matters further.