Discussion:New LLC Formation - Foreign Member

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Discussion Forum Index --> Tax Questions --> New LLC Formation - Foreign Member


Mikelim (talk|edits) said:

5 July 2006
I am helping to incorporate a new 4 person LLC. One of the members is a Canadian resident, who wants compensation to be paid to her Canadian corporation, and not her personally (for IRS and INS reasons).

By my own thinking, the only way to have the guaranteed payments and the distributive share of LLC income not attributed to her personal TIN and go to her Canadian Corporation is to have the corporation be a member of the LLC.

Can this be done? Does that Corporation get a K-1?

If not, are there any other creative ways to structure payments so they don't go to her directly? We could treat her corp. as a vendor, and not have her as an individual receive an guaranteed payments or share of income, but this doesn't seem right...

Any thoughts would be greatly appreciated.

JR1 (talk|edits) said:

5 July 2006
Mike, you're flat freaking me out. You call this a corporation, then talk about guaranteed payments. Pick one. Is this a partnership or a corp? I don't believe you could have a foreign owner, corp. or otherwise, in an S corp. So you'll have to be a 1065 filer. And I don't see why her Canadian corp. couldn't be a member/partner...yes, that corp. would get a K1. But what number are you going to file it under? She'll need to have some sort of US tax number...And indeed, one of the common ways to handle a foreign player is to have them bill for services, which gets around the whole problem.

Mikelim (talk|edits) said:

5 July 2006
Perhaps I should be more clear. She has a Canadian Corporation, but would be a potential partner in a CA LLC - filing as a partnership (1065).

I did not call the LLC a Corp...3 partners as individuals, the last as a Canadian Corporation.

JR1 (talk|edits) said:

5 July 2006
Ahem. Your sentence, not mine: I am helping to incorporate a new 4 person LLC.

Mikelim (talk|edits) said:

5 July 2006
Ahh...I mispoke. To clarify - I am helping to form a 4 person LLC. Thanks for pointing that out

JR1 (talk|edits) said:

5 July 2006
*laughing* no problem, just trying to get the facts straight. We do need a term for LLC'ing an LLC...Anyway, I did have a similar situation with a foreign potential shareholder, who in my case, was providing merely managerial services but wanted a profit share. In the end, we decided to have him bill, via a foreign corp. that he owned, for services. That freed up the corp. to take on whatever status it wanted and not get saddled with foreign reporting. That's what I'd try to do here. Otherwise, your Canadian eh partner will have to get a TIN for her corp so that the K1 can even be issued. Now for thoughts from others more familiar with foreign issues...Sandy...oh, Sandy, where are you?

Mikelim (talk|edits) said:

5 July 2006
Hmmm...LLC'ing an LLC. Man, we make our profession too complicated at times. And I am to flippant with my wording at times...good thing i'm not a lawyer. :)

I thought about your suggestion, and would actually much prefer to go that route. What about the ownership component?

If she is treated simply as a vendor, and not a true LLC member, how could we go about protecting her rights and ownership in the LLC?

Technically, in going the vendor route, she would not have any ownership in the LLC or its assets. Since she is going to be materially participating, and not merely managing, the ownership component does seem to become more important.

JR1 (talk|edits) said:

5 July 2006
You'd have to be careful, I'm sure, that whatever agreement that's struck doesn't give rise to the incidence of ownership or whatever they call that. I'd leave it between the partners. . .and her, the non-partner. Or she can get a US tax number for her corp...and be on a K1...Where is Sandy anyway? She's our foreign expert on Canada eh. Wait before you do anything. She'll be here soon enough.

JR1 (talk|edits) said:

6 July 2006
*bump for Sandy*

Sandysea (talk|edits) said:

7 July 2006
Ok...as far as I am reading, you have a Canadian citizen who is a partner in an LLC in California...you want the income from the LLC to go to the corporation in Canada which she owns. There WILL be foreign reporting requirements if she is a more than 25% owner in the LLC. She needs a TIN either individually or a TIN for the corporation doing business in the US. She has to report all income generated from doing business in the US or for guaranteed payments such as dividends and/or interest that the LLC receives.

She, as a foreigner has to report all income from US sources even if she is an individual; and she has to report it from a Corporate standpoint as well if the Corporation owns part of the LLC. In either case, she has to report income from US sources whether it be fixed income or earned income.

If she provides services to the US LLC, then some of this as well will be taxed to her at an individual level as well as determining her days present in the US for resident purposes.

No matter how you structure it, any income generated in the US (if not exempt from a treaty) will be taxable income to her in the US. As well, state taxes are not governed by a treaty....

Mikelim (talk|edits) said:

7 July 2006
Sandy - thanks for the response, I appreciate your input.

I am in the process of organizing the LLC right now - I have not started the process just yet until I determine the best structure for this Canadian member.

It is a 4 person LLC...Is the 25% ownership a firm rule for foreign reporting requirements? I don't want to be too cute about it, but if we make her a 20% partner, would this avoid the reporting requirements?

If I am understanding your post, even if we make her Canadian corporation an LLC member, she will still have to report any income the CA LLC pays to her corporation.

Also - clarification on one point..."if she provides services to the US LLC, then this will be taxed to her at an individual level." If all payments for services are invoiced out of the Canadian corporation and not to her as an individual, what income is attributable to her personally.

Looks like there is not too many creative ways around this...I will do a little more research myself in my RIA database.

Again, I appreciate the feedback.

Sandysea (talk|edits) said:

7 July 2006
A 20% partner in the LLC if it is still flowing to a Canadian corporation, this needs to be reported as foreign income to the Canadian government; and any income generated from US sources, if she meets a residency test in the US is also taxable to her on an individual basis if she gets a K-1.

Yes, if the Canadian corporation is an LLC member, then the income from the US will be taxed in the US and Canada as well, but the treaty exemption will apply on some of this income.

If she personally provides services to the US LLC, then she is "working for" the US entity and if she meets the residency test, then she will be taxed on her income from US sources.

If a Canadian wants to work and do business in the US, then their income from US sources is taxed in both the US and Canada except for the treaty exemptions.

I don't know of any way around the reporting requirements. IF she is earning money in the US from sources in the US, either corporately or individually she will be required to report and/or pay tax on it...

Mikelim (talk|edits) said:

13 July 2006
Sandy - again, thanks for the information. I have not faced this situation before with a Canadian Corporation as a member in an LLC. I have a couple other pieces of information that are relevant:

- She lives in the US under her Husband's status (H-1 visa). Both are Canadian citizens. - Although she can live here, she does not have a sponsoring employer currently, so she cannot legally work. - As such, whenever she does independent contracting work, she has those folks pay her Canadian corporation. (she has confirmed to me that those folks never followed the reporting requirements for foreign citizens. As such, she has never filed taxes in the US).

Given the above, I want to structure her activity in the LLC as an agent of her Canadian corporation, and keep the Canadian LLC a limited partner (at least until she sorts this out in about a year).

So, at the end of the year, does the LLC file a 1042-S for payments made to her Canadian corporation? What are her US filing requirements if all payments (and K-1 income) are going to a Canadian Corporation).

Pardon my ignorance - this is all beyond my scope of knowledge.

JR1 (talk|edits) said:

July 13, 2006
You'll have to wait. She's in the Bahamas brushing up on her British tax law, apparently....

Mikelim (talk|edits) said:

14 July 2006
JR1 - yes, I saw her post. Good for her! I just picked up a couple of clients in Maui - I may have to brush up on HI state tax law! :)

JR1 (talk|edits) said:

July 14, 2006
Talk to Natalie...there are a couple others. In fact, check the General page, I think there's a HI user group here...they do have some oddities there.

Tdoyle (talk|edits) said:

14 July 2006
Here it is: Hawaii User Group. Let me know if you'd like me to create a similar user group for your state!


- Tim Doyle, TaxAlmanac Moderator - Talk to me 11:46, 14 July 2006 (CDT)

Sandysea (talk|edits) said:

15 July 2006
Hi Mike;

did She obviously has some issues due to her past involvement in the US that was not reported to Canada as world wide income I would assume and then also, the US did not get any benefits from her income earned here. But that will need to wait I am assuming...

Setting up the LLC as a subsidiary of her Canadian corporation will be complicated at best. The LLC cannot be passive if she is actively involved in the business, so how can you set it up as a passive entity? The resident partner of this is a Canadian citizen, but a resident of the US for tax purposes (visa and substantial presence test). What you are trying to accomplish I think is: she consults and earns income from the consulting, but since she cannot legally work in the US, then it needs to be as an agent of the foreign corporation.

If this is so, then why cannot her corporation in Canada file as a foreign corporation in the US and receive an EIN and report it's income on an 1120F for any US source income? Now, the downside of this is that she has created nexus and therefore will have state taxes on top of it all.

Citizens of Canada are taxed on worldwide income, so some treaty benefits need to be addressed no matter what type of entity you decide upon.

Nassau is fabulous by the way!! I have seen things which you can never see on vacation. I picked up a new Canadian client this week from here...lots of Canadians work on this island. I may not be back to the US until the 30th now...more work than was originally expected, but we shall see.

You can email me if you like at sandy@sandyseacs.com

Take care and let me know what you think about the above :)

Mikelim (talk|edits) said:

2 September 2006
Thanks, IT. I have gathered most of the information through my research and conversation with SandySea.

It is complicated, but at least it is more interesting than the run of the mill stuff we usually have to deal with. :)

Sandysea (talk|edits) said:

2 September 2006
Interesting yes Mike...easy, no!!! You will do just fine I am sure. Be very careful when it comes to mixing US/foreign activities to avoid any transfer pricing issues..

Mikelim (talk|edits) said:

5 September 2006
I'll probably have to bend your ear again, as I run through the logistics of my LLC. Thanks again for all of the help!

I always enjoy doing the harder stuff and having to do some research. To me, it just constitutes continuous learning and helps me provide more value to more clients in the future.

LKfromCANADA (talk|edits) said:

6 September 2006
Just read all this. You have to be careful using an LLC from a Canadian tax perspective. Canada does not recognize the LLC as a flow through entity and taxes the members on distributions as dividends resulting in double taxation. We usually recommend that Canadians invest through a partnership. If liability is an issue, then we use a limited liability partner with a U.S. C corporation as the general partner holding 1% of the partnership.


Kenneth135 (talk|edits) said:

12 February 2007
I have an LLC with a Canadian partner (individual) owning 50%. Does the LLC file 8804,8805 and x the box that says exempt and therefor the LLC only files the forms. It does not pay any tax for the canadian partner since there is a tax treaty with canada. Does anyone know if this is correct?

Sandysea (talk|edits) said:

12 February 2007
Is the Canadian partner a resident of the US or do they only own a passive interest in the US LLC? Depending on the LLC's business venture, it could be effectively connected income in the US. No tax paid on the payments to the Canadian partner? I could see a reduced treaty rate, but why no tax at all on the income to the foreign partner?

Mikelim (talk|edits) said:

12 February 2007
Sandy - It looks like my original post "outed" you as the resident Canadian tax expert!

Sandysea (talk|edits) said:

13 February 2007
HEHE Mike; I don't know about all that, but I thank you for the compliment :)

Smktax (talk|edits) said:

13 February 2007
Kenneth, your summary is not correct. If the LLC is treated as a partnership for U.S. tax purposes, the LLC should file Forms 8804, 8805, and 8813. The LLC should withhold tax at the 35% rate. See Sec. 1446. The Canadian partner is deemed to be engaged in a U.S. trade or business. See Sec. 875. Further, the Canadian partner is deemed to have a permanent establishment in the U.S. See Donroy, Ltd. v. United States, 301 F.2d 200 (9th Cir. 1962) and Unger v. Commissioner, 936 F.2d 1316,1319 (D.C. Cir. 1991). There is no reduced treaty rate for income attributable to a permanent establishment.

Kenneth135 (talk|edits) said:

13 February 2007
smktax, I was told that since this is a nonresident alien of Canada owing 50% of the LLC that I just have to check the exempt box on form 8805 and therefor no withholding tax was applicable since I was told that the US does have a tax treaty with the U.S. Are you saying there is no tax treaty and I must withhold the 35%?

Smktax (talk|edits) said:

13 February 2007
I am saying that there is a treaty, but that the treaty does not apply to exempt this income from U.S. taxation.

Sandysea (talk|edits) said:

13 February 2007
IF the partnership is engaged in a trade or business in the US that is and the partner is anything but a passive investor. There could be a reduced treaty rate for some of the income, but you have to identify what types of payments are made to the partner and what his involvement is in the LLC/partnership. Is this passive or not?

Smktax (talk|edits) said:

14 February 2007
Sandy, you state that the partnership must be engaged in a U.S. trade or business AND the partner is not passive. This is wrong. The partner does NOT need to be active to be subject to U.S. tax. The following is a quote from Rev. Rul. 2004-3

"In Donroy, Ltd. v. United States, 301 F.2d 200 (9th Cir. 1962), the court held that the U.S. permanent establishment of a partnership was attributable to a foreign person that was a limited partner under the 1942 U.S.-Canada income tax treaty. In Unger v. Commissioner, 936 F.2d 1316,1319 (D.C. Cir. 1991), the court followed the holding in Donroy, noting that it stood for the proposition that the office or permanent establishment of a partnership is, as a matter of law, the office of each of the partners—whether general or limited. See also Johnston v. Commissioner, 24 T.C. 920 (1955) (holding that a partnership’s permanent establishment is deemed to be a permanent establishment of its partners); Rev. Rul. 90-80, 19 90-2 C.B. 170 (same)."

Because the U.S. office of the partnership is attributed to the Canadian partner, the partner has a U.S. permanent establishment.

Kenneth, before I forgot to mention that the Canadian partner will need to file Form 1040NR.

Sandy, you also state that there could be a reduced treaty rate on the income, depending on the type of income. Again this is wrong. If the income is attributable to the permanent establishment, then no special reduced rates apply. If the income is not attributable to the permanent establishment, then, while certain non-effectively connected income might normally qualify for treaty benefits, in this case the income would not qualify for treaty benefits because the income would not be "derived by" the Canadian LLC member because Canada does not treat the LLC as a flow-thru entity. See Reg. 1.894-1(d)(1).

Sandysea (talk|edits) said:

14 February 2007
Touche' on the fact of the PE in the US. But a partnership whereby the partnership is not actively engaged in a trade or business in the US (for instance only an investment partnership) with no office or any other sort of permanent establishment, then the income will be only subject in the US for income effectively connected or FDAP income where a treaty provision will apply. We don't even know that the partnership HAS any permanent establishment in the US...we don't know if they have an office or any assets, etc. The question was a 50% S/H in a partnership...what kind of partnership?

Yes, if income effectively connected with a trade or business is taxed just like a US resident is taxed....I think we agree but I don't think I either am understanding his question or you know more about what his situation is than I do.

If the partner is not actively engaged and there is no operating of a business in the US, then income is treated with a reduced treaty rate on some areas of the income.

My question still is: what business is the partnership in? Is this a passive (no permanent establishment) or is this operating a trade or business? Questions about assets, intangibles, offices, employees, etc. have to be answered to determine the taxation of the partner...imho :)

Smktax (talk|edits) said:

15 February 2007
Sandy, you mention that the treaty would apply to FDAP income recognized by the LLC that is allocable to the Canadian partner. This is NOT true in this case. The FDAP income would not be "derived by" the Canadian LLC member because Canada does not treat the LLC as a flow-thru entity. If income is not "derived by" a resident of a treaty partner, then treaty benefits are NOT available. Reg. 1.894-1(d)(1).

Sandysea (talk|edits) said:

16 February 2007
MY QUESTION: WHAT TYPE OF PARTNERSHIP is this individual in? Are they operating a "net rental" activity, investment activity? The poster of the original question sited that they only needed to claim treaty benefits on Forms....so I assumed that the partnership is NOT engaged in a trade or business in the US.

Moot issue; poster has not responded and this is a topic for pure discussion only I assume :)

Kenneth135 (talk|edits) said:

27 February 2007
This was a non resident alien from Canada, a limited partner owning 50% of the LLC in the U.S. I talked to a Canada accountant who says I must complete the 8804 and 8805 and pay the withholding tax at a rate of 35%.

Sandysea (talk|edits) said:

27 February 2007
Is the partnership engaged in a business in the US? Damn those Canadians....oops sorry but there are different tax treatments for partners. IF the partnership is engaged in a trade or business in the US, then the partner will be taxed on his share, regardless of his status....perhaps that is why the accountant is saying withhold at 35%; that is the top level of taxation for an individual in the US....

If it is passive income and the partnership is NOT engaged in a trade or business in the US, then you only will have to claim treaty benefits and pay taxes that are due under the reduced treaty rate :)

Smktax (talk|edits) said:

28 February 2007
Sandy, I apologize if I sound like a broken record. However, the reduced treaty rates do not apply to passive income allocated to foreign LLC members unless the foreign country treats the LLC as a flow-through entity. Because Canada does not treat LLCs as flow-through entities, the reduced rates on passive income under the U.S.-Canadian income tax treaty would not apply. I have already cited the applicable regulation twice above.

Sandysea (talk|edits) said:

28 February 2007
Sorry SMK....my bad...you are most correct; there is no flow through for Canadians and I apologize for the instances....by a typical standpoint, if the foreign country recongizes the flow through, then we are good....

Please accept my apologies on this....


Benken (talk|edits) said:

4 April 2007
I have a related question. I have a client that wants to form a new LLC. My client wants to be 50/50 partners with a German entity. Several years ago, my client and the german entity entered into a joint venture, and the attorney working on the transaction told them that they had to form a general partnership, because the german entity was prohibited from being a member an LLC. I've never heard of such a thing. Is this a case of bad advice, or am I missing something?

IntlTax (talk|edits) said:

5 April 2007
There is no prohibition on non-U.S. entities owning interests in US LLCs. However, if it is a U.S. LLC and the LLC is treated as a partnership, the partnership will need to withhold tax on profits allocated to the German owner and the German owner will need to file a U.S. tax return.

RoseBerk (talk|edits) said:

23 April 2007
I have a related question, please. In the discussions above, I'm a bit confused by recurring language "income earned in the US". My client formed a Delaware LLC, environmental services, none currently performed in US. Majority owner is a US national living in an Asian country; a significant minority owner (greater than 25%) is a European national living in a South American country who might perform services there in the name of the LLC (He would invoice the services in the SA country as services performed by the LLC.) No work or payments in or to the US. What US tax consequences to the 2 Members, respectively? What foreign tax liability to them, respectively? Thanks for any guidance.

LKfromCANADA (talk|edits) said:

24 April 2007
Haven't checked this site for awhile.

Although there are no U.S. issues preventing a Canadian from investing in an LLC, the Canadian rules are very harsh. SMKTAX is correct that Canada treats the LLC as a corporation with no flow through. Distributions from the LLC are taxed as dividends. Canada's foreign tax credit "baskets" consist of Business and Nonbusiness. The income earned by the LLC would be considered business tax and the dividend income is nonbusiness tax. As a result, the Canadian does not get a credit for the U.S. tax paid causing double taxation.

We usually recommend that a U.S. subsidiary of the Canadian corporation hold the LLC interest. As long as the business income is active (not investment), this results in the lowest tax rate.

Sandysea (talk|edits) said:

24 April 2007
Rose....if no US source income is present and there is no US person defined in the LLC, then no US taxes are imposed. However.....

You may be creating nexus in the US based on services and offices in the US. Is this only a letterhead that indicates it is a US based business in DE?

You are taxed on US source income, or US persons are taxed on world wide income....you had best look clearly at what is the amount of involvement in the US and what income could be attributed to an office in the US....

RoseBerk (talk|edits) said:

26 April 2007
Sandysea, Thank you for the reply. At present there is no US source income -- letterhead and Delaware incorporation nexus; two major Members are a European national in South America earning income which could be in the name of the LLC (this is my main focus at present -- I'm trying to advise him whether he can put his services in S. America in the LLC's name without incurring US tax liability; at present I don't think ANY of his income could be attributed to any presence or activities in the US), and a US national in Asia presently trying to generate business and/or investment in Asia. Other US nexi are small Members/investors who are US citizens residing in the US, a couple of whom are on the Management Committee -- which meets only telephonically. Thank you.

Garygauvin (talk|edits) said:

26 April 2007
The Canadian budget, recently released, proposes to treat LLCs taxed as partnerships similar to that afforded S corps for US citizens residng in Canada. You will still have to get written approval from Competant Authority for the provsions to apply though.

Who knows what the final written provision will actually look like.

SunGod (talk|edits) said:

26 April 2007
Wonderful article in the current edition of the Journal of Accountancy which explains the nauances of international transactions. Here is the link (I hope I'm not infringing on any copyright laws by pasting the link):

https://www.cpa2biz.com/News/Journal+of+Accountancy/2007/April+2007/Taxing+International+Transactions.htm

Sandysea (talk|edits) said:

26 April 2007
Well Rose...make sure that the sales that are generated in the foreign countries are not ATTRIBUTABLE to the US office; then it would be US source income.

RoseBerk (talk|edits) said:

4 May 2007
Thank you, Sandysea. Cautionery advice acknowledged.

LAEsquire (talk|edits) said:

4 May 2007
By the way, the term for forming an LLC exists - the LLC equivalent of incorporating a corporation - it's "organizing".

As in Organizer instead of Incorporator.


Queenie (talk|edits) said:

21 February 2009
One LLC company has two partners. One of them is foreign partner owns 50%. This is the first year I'm filing their Form 1065. The company had a loss in year 2008 and never filed any form 8804, 8805, or 8813.

Is that true that I will also need to attached W7 and Form 8805 with the form 1065? If the company has a loss, do they still have to file form 8804 or 8813? Are the calculation based on Gross income or net income? What other requirements are needed with filing the W7, any ideas? Please help. Thanks.

Isabeldpe (talk|edits) said:

11 November 2009
Two questions:

1. Can three non residents, together with one resident, form an LLC abd opt to be taxed as a Subchapter S or would there be a US residency requirement for all members.

2. There could be two scenarios: one where a foreign corporation owned 100% membership and another where it would own 51% and three other physical persons (two non residents and one resident) shared remaining 49% interest. Which is more convenient taxwise?

LH2004 (talk|edits) said:

November 11, 2009
For it to elect to be an S corporation, all of the members would need to be U.S. citizens or residents or a very limited category of trusts. No nonresident aliens, and no corporations.

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