Foreign Owned US LLC - 1040NR/Sch C?

Technical topics regarding tax preparation.
#1
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Hey guys,

Sorry for the book...please bear with me.

I've picked up another potential foreign individual client and have been melting my brain this morning figuring out what his obligations are in order to price his services.

In a nutshell, he is a resident of India and established a US LLC (of which he is the sole member) to sell widgets to customers in the US. He does not manufacture the widgets and just purchases resells them. The US LLC is disregarded, no alternative tax election was made. The US LLC is his only US source income.

I've already established that a 5472 with an 1120 proforma needs to be filed for 2017 for the US LLC. That was the easy part!

What I'm racking my brain over is whether he needs to file a 1040NR with Schedule C. He claims he was told he doesn't need to (yeah we all know how that goes) because of the tax treaty. I'm leaning toward he needs to file the 1040NR, and I'll detail why.

Based on Pub 901, only certain types of income are exempt from tax under specific scenarios. The of income types are:

-Professional services
-Teacher, professor, or researcher
-Student or apprentice
-Payments from foreign government

I confirmed all of these in the 1991 US-India tax Treaty. In the Treaty, it defines professional services as including "independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants." Selling widgets clearly doesn't fall into this category.

What I think is the relevant guidance is found in Article 7, Paragraph 1 of the Treaty. It is as follows:

1. The profits of an enterprise of a Contracting State [emphasis added] shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to

(a) that permanent establishment;

(b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or

(c) other business activities carried on in the other State of the same or similar kind as
those effected through that permanent establishment.


Because the US LLC is organized in the US and carries on business in the US, I'm reading that as the profits of the US LLC will only be taxed by the US unless it has a permanent establishment in India. Therefore, the foreign individual needs to file 1040NR with Schedule C to report the US LLC's activity.

Do you agree with my methodology? :?

Possible planning opportunity: late election for C Corp status would kill the 5472 obligation for 2017 and may be more beneficial depending on future projected income. I'd have to look into the ramifications of eventual wind-up though to see what those look like.
 

#2
Smktax  
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ManVsTax wrote:Because the US LLC * * * carries on business in the US, * * *


Is the US LLC carrying on business in the US?
 

#3
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Smktax wrote:
ManVsTax wrote:Because the US LLC * * * carries on business in the US, * * *


Is the US LLC carrying on business in the US?


Yes, all sales are to US customers.
 

#4
Smktax  
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So all persons that sell to US customers are carrying on business in the US?
 

#5
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Good point.

I would need to confirm but I believe the owner is fulfilling orders and running the business from India....which would seem like the permanent establishment is in India and not in the US. Because the LLC is disregarded it's as if he's running an Indian proprietorship with US customers but no permanent establishment in the US. Therefore, no US tax here.

Does that correlate with your thinking?
 

#6
Smktax  
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That is one possibility. Another possibility is that the existence of the US entity, a US bank account, US located inventory, and other US-related activities rise to the level of carrying on business in the US. Are there considerable, continuous, and regular activities going on in the US? If yes, then the treaty might help to avoid US tax, but the treaty position would need to be disclosed by filing Form 1040NR with Form 8833 attached.
 

#7
Smktax  
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Of course, a serious concern is that the LLC may be taxed as a corporation in India and that your client’s activities in India on behalf of the US LLC may cause the LLC to be subject to tax in India. If the US LLC is not filing Indian income tax returns and reporting all of the income in India, then your client may be committing tax fraud in India. Wouldn’t it be a bit odd for the US LLC’s profits to not be taxed anywhere? At first you might say that Indian tax concerns are none of my [US tax advisor’s] concern, but then there is the Pasquantino case . . .
 

#8
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Smktax wrote:That is one possibility. Another possibility is that the existence of the US entity, a US bank account, US located inventory, and other US-related activities rise to the level of carrying on business in the US. Are there considerable, continuous, and regular activities going on in the US? If yes, then the treaty might help to avoid US tax, but the treaty position would need to be disclosed by filing Form 1040NR with Form 8833 attached.


Thank you Smktax. I have some homework tonight.

Smktax wrote:Of course, a serious concern is that the LLC may be taxed as a corporation in India and that your client’s activities in India on behalf of the US LLC may cause the LLC to be subject to tax in India. If the US LLC is not filing Indian income tax returns and reporting all of the income in India, then your client may be committing tax fraud in India. Wouldn’t it be a bit odd for the US LLC’s profits to not be taxed anywhere? At first you might say that Indian tax concerns are none of my [US tax advisor’s] concern, but then there is the Pasquantino case . . .


Agreed. If it's not taxable here it should be picked up on an Indian return, and vice versa.
 

#9
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how about countries without the tax treaty?

I have the same issue with client in Argentina

no tax treaty

solo owned DE LLC

all web based services ( website support) are being provided in Argentina to US company

DE LLC has US bank account where US income is coming to

then DE LLC pays to his own company ( pass through) in Argentina for the services and pays taxes on this income in Argentina

My position he needs to file 1040NR, report all DE LLC's income, deduct payments to his company in Argentina as an expense and pay taxes in US on the difference

We've already filed 1120/5472

thank you and please let me know what you think
 

#10
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Did the US client company request a W-9 from the US SMLLC?

Assuming SMLLC is disregarded, I agree with:

-SMLLC files 5472 with an 1120 proforma
-Non-resident alien owner files 1040NR with Schedule C

What's not clear/additional thoughts:

Why is the SMLLC 'paying' his Argentinian company? Is this a management fee or cost sharing fee that gets expensed on Sch C above? If so should the SMLLC be collecting one of the W-8 series of forms from the Argentinian company and withholding tax on payments? Does this then create a US filing obligation for the Argentinian company? Or should we treat as an owner's draw from the SMLLC to owner and a contribution from owner to Argentinian company?
 

#11
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It would seem with no tax treaty to mitigate double taxation, the services are taxable in full by both jurisdictions.

I'm leaning toward there shouldn't be an expense on Sch C. i.e. If taxable income is $10k before transfers/payment to Argentinian Co, we should see $10k on both his Sch C and his personal Argentinian tax return. If he gets a tax credit for the US tax paid good, if not that's the cost of doing business in the US for him under this fact pattern.

If that money finds its way into the Argentinian company, it would seem that's a contribution of owners capital, but I don't know Argentinian tax law.
 

#12
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thank you for your comments, ManVstax
as I understand before 01/01/2017 this foreign-owned disregarded LLC without physical presence did not have any filing requirement in US at all

Effectively, as a foreigner, you must have no US presence. You are only subject to US tax if you are “engaged in a trade or business in the United States”, which only applies if two things are true:

(1) you have at least one “dependent agent” in the US, which are employees or companies that work for you almost exclusively, and

(2) this dependent agent does something substantial to further your business in the US, as opposed to something purely administrative.

If you don’t have a dependent agent that substantially furthers your business in the US and don’t have an office in the US, you are not subject to US tax. Even if the LLC generates income in the US, the income is not taxed in the US.
 

#13
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Where are you reading that?
 

#14
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a lot of different sources
 

#15
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Yes but are they authoritative? IRC? Regs?
 

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#17
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That link doesn't back up what you asserted in #12 though. (and it's not authoritative)

From the link:

"Generally, whether or not a person is engaged in a USTB shall be determined on the basis of the facts and circumstances of each case. A NRA can have a USTB through a dependent agent." [emphasis added]

"To be engaged in a trade or business, a taxpayer (either directly or through a dependent agent) must be involved in an activity that is considerable, continuous and regular, and the taxpayer’s primary purpose for engaging in the activity must be for income or profit. A sporadic activity does not qualify. "


As you have no tax treaty to look to, and because the SMLLC is disregarded, your best bet for arguing not ECI and not taxable would be IRC Sec 862 and the other sections and related regs under Subchapter N.
 

#18
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Thank you very much ManVsTax

I appreciate your input
 

#19
AnitaL  
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HI, All! Hope your tax season is going well.
I have a single member LLC, owned by a German citizen. She has an ITIN for herself as well as a EIN for the LLC.
She formed the LLC in the fall of 2018. The only thing that has happened so far is that she opened a bank account and put in $3000. No other transactions for 2018 save for the filing fee for the NC Secretary of state.
She wants to file a 1040NR, with a Sch C. Is this the right way to go?

I know she also needs to file form 5472.
Thanks for any insight!
 

#20
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The SMLLC definitely has a 5472 obligation for 2018 because of the $3,000 capital infusion.

Not sure if she has a 1040NR obligation though.... Did she have any US source gross income? Doesn't sound like it...

Whether she files Sch C vs other schedules (Sch E) depends on what the SMLLC ends up doing.
 

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