The first step will be to review the tax election made on the SS-4 filed to obtain the EIN. From there a discussion of which option is more tax efficient and should have been taken.
There are two options available:
Partnership – An election where the LLC files a return(Form 1065) that assigns the profit or loss to the partners who will then need to file their own returns in the US reporting any ECTI(Defined below). One compliance caution here is that a Form 8004 and 8005 need to be filed reporting a statutory 30% withholding unless exempted via a treaty election on a Form W8BEN. Defining, withholding and payment of this withholding are important considerations in selecting the partnership format.
C Corporation – An election where the LLC files a return(Form 1120) that reports the net income and pays its own tax at 21%. The compliance caution here is that a Form 5472 needs to be filed to report the foreign ownership as not filing the report will create a $25,000 penalty.
The second step which is a simultaneous consideration will be to determine if the LLC income is Effectively Connected Income(ECTI). In the US, one of the guiding rules is that of ECTI which will determine the US taxation of any profit. Determining whether or not ECTI is at play is not a simple process and is often incorrectly determined. We would suggest a detailed review with a tax professional take place so the proper reporting can follow.
The third step is a careful reading of any tax treaty which may be in place between the US and the owners home country. Most treaties work to remove the possibility of double taxation. Sometimes these benefits take the form of excluding income in one country if reported in another and other times they are taxed in both countries but a tax credit is given to offset the taxation in the other country. A careful reading of any treaty needs to be made.
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