Taxation of a Wyoming LLC owned by a non resident foreigner
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Taxation Summary
A Single Member Wyoming LLC owned by a non-resident foreigner receiving business income is not subject to Federal or State income tax in the U.S. if the owner is not providing services while physically inside U.S. territory, regardless if the payor is a U.S. person or if the payor located in the U.S.
LLCs Tax Classifications
The tax treatment of the Wyoming LLC will depend on several factors, these include how many owners it has, the tax residency of the owner(s), or its tax election.
Default classifications:
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Single Member LLC owned by a U.S. Person: sole proprietorship.
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Single Member LLC owned by a non U.S. tax person: Foreign Owner U.S. Disregareded Entity.
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A Multi Member LLC owned by more than 2 persons, regardless if they are U.S. or Non US Persons: Partnership.
Election to be taxed or classified differently to their default tax classification:
In addition, an LLC can elect to be taxed as a C-Corporation or an S-Corporation, this allows the owners to have the corporate simplicity of an LLC, yet benefit from.
Tax classification required for the Wyoming LLC to be a tax-free offshore company
When using a Wyoming LLC as a tax-free offshore company, it must be as a Foreign-Owned U.S. Disregarded entity, which is the classification for Single Member LLCs owned by a non-resident foreigner.
Taxation of a Single Member LLC owned by a non-resident foreigner
Single Member LLC’s are what is called pass-through entities (also called tax-transparent), meaning that the LLC itself does not file an income tax return, but the income is passed directly to the owner, and the owner is taxed on that income depending its tax status. When the owner is a non-resident foreigner, the IRS classifies the LLC as a “Foreign Owned U.S. Disregarded Entity”, so the LLC is ignore for tax purposes.
If the income did not have U.S. sourced income, hence the income that is passed to the owner is not U.S sourced as well, then the I.R.S will not tax that income, as the IRS only has the right to tax U.S. Sourced income.
Tax Residency
A Foreign-Owned U.S. DE is not a tax resident in the U.S. just like the Singapore or Cayman Islands company is not a tax resident , and that is because the LLC has the same tax Status of the Owner.
Said in a different way, the IRS would treat the Wyoming LLC income the same way it would treat a Singapore or Cayman Islands: it will be taxed only if it is from U.S. sources, and the fact that a Wyoming LLC is receiving the income does not convert that to U.S. Sourced or as engaged in trade or business in the U.S.
No income tax return filled by the LLC or the Owner
Wyoming LLCs do not file an income tax return, and the Owner also does not file an income tax return.
What is U.S. Sourced Income?
U.S. Sourced income is income that originates from the United States. To determine if an income generates form the United States, it will depend on the factor of determination of each of income.
Income from providing professional services, salaries, wages, business income, and other compensations, is tax-exempt
This income is determined by where the person providing the service is located in, not by the location or tax status of the payor. So if you form an LLC, and this LLC is paid for professional services which you provided while physically located outside of the U.S., or if you are receiving a salary from you Wyoming LLC and, this income is not U.S. Sourced, hence tax-exempt, regardless if the Payor is a U.S. Person or Company or located in the U.S.
Passive income is subject to taxes if paid by U.S. persons or is property subject to passive income is located or used in the U.S.
However, passive income, such as dividends, royalties, and interest (excluding bank deposits) from U.S. sources, is treated differently. This type of income, known as 'Fixed, Determinable, Annual, or Periodical (FDAP)' income.
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So lets say a U.S. Company is sending your Wyoming LLC a payment in the concept of Royalty. The U.S. Company will have to withhold 30% income tax as the Wyoming LLC is considered a “non-tax resident in the U.S.”. Same withholding tax rate would apply if the U.S. Company was paying you the royalty to a Cayman Islands company.
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Another example would be if buy a Real Estate property in the U.S.A under a Wyoming LLC or a Cayman Islands company, and rent this property. Since the Factor determining Source for Rent is the location of property, this rental income would be subject to a 30% withholding income tax.
A C-Corporation might be a better option if you will have U.S. Sourced income
In case you or your company will have U.S. sourced income as a non-resident foreigner, sometimes it might be better to incorporate a C-Corporation instead of a Single Member LLC as the corporation will be considered a tax resident, hence not subject to U.S. withholding tax, and reduce the C-Corporation withholding tax via international tax planning, as when you are paid U.S. sourced income as a non-tax resident, you are withheld 30% withholding tax without allowing you to claim costs and expenses (deductions) unless you are subject to a lower (or exempt) tax rate under a Double Taxation Avoidance Agreement.
What if the WYoming LLC has a mix of non-US sourced income and U.S. Sourced income?
If the Wyoming LLC has a mix of both non-US sourced income and U.S sourced income, this won’t affect the tax treatment of the non-U.S. sourced income, as the LLC does not fill an income tax return, and when the Wyoming LLC receives the portion of income that is U.S. sourced, the LLC will give the payor a W-8ben form certifying its non-us tax status (not U.S. tax resident), and it will be subject to the corresponding withholding tax, satisfying at this stage the total tax liability for that specific U.S. sourced income.
