Tag Archives: US

US tax rules for a Delaware LLC

23 Monday Nov 2020

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If you are the owner of a Delaware Limited Liability Company (LLC), it is essential that you know what you have and what your responsibilities are. Requirements are in constant flux and need up-to-date procedures. If you have held your company for several years, current compliance obligations may be a far cry from what you started with. Failure to comply can be both time-consuming and expensive.

US Federal taxes

A legal Limited Liability Company (LLC) in Delaware with more than one member (shareholder) has a default status of a tax partnership. The LLC is not in itself a tax paying entity but passes any taxation on income and expenses to its shareholders as tax partners. These non-US resident tax members are responsible for assessment on any net profits at 30% of their US-sourced income.

As a non-resident owner of a Delaware LLC, foreign-sourced income is not assessable in the US. However, there are still strict reporting requirements. Members must file 1040 NR individual income tax returns even though there may be, in fact, no taxable US income. These annual reporting requirements were introduced in 2017. As part of the process, shareholders need Individual Tax Identification Numbers (“ITIN”) which can be obtained at the time of filing the tax declaration. Application for the ITINs involves submitting “apostilled” documentation including reporting on identity. Non-compliance carries a fine of $10,000.

Delaware State Taxes

Unlike most states in the US, Delaware does not require an LLC to file an annual report. However, companies must pay an annual “franchise” tax. By default, since LLCs are “pass-thru” tax entities, the responsibility for paying federal and state income taxes “passes thru” the LLC itself and falls on the individual LLC members (shareholders). Currently, the State of Delaware imposes a flat annual tax of $300 on LLCs. The levy is due on or before 01 June with a $200 penalty for late payments.

Under certain circumstances, owners of an LLC may choose to have their business treated as a taxable corporation. The State of Delaware, like almost every other state, taxes corporate income. Corporation income tax in Delaware is a flat 8.7% of federal taxable income.

“FBAR” compliance

If a Delaware Company has a financial interest in or signature authority over an overseas financial account, the US requires annual reporting to the Internal Revenue Service called “FBAR”. This obligation can undermine any element of confidentiality in addition to adding another on-going compliance commitment and cost. “FBAR” non-compliance is subject to a $10,000 penalty.

The Alternative

The litany of problems goes on and on. Redomiciliation can be an attractive alternative to the ever-growing list of headaches associated with Delaware LLCs. When a company moves its base of operations to Portugal, there is no asset transfer and no assessment takes place. Only the headquarters and effective management change. Assets remain securely within the Company. In addition, there is often an opportunity to uplift the share value of the LLC which can be doubly beneficial due to the fact that many Delaware companies understated share capital at the time of formation. Annual running procedures are stable, and costs are modest, often a fraction of charges for Offshore Companies.

US Expats: Travelling with your pet

17 Monday Aug 2020

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by Suzana Horta Greene

Are you planning to fly with your pet to Portugal? TAP and some other airlines welcome dogs to travel in the cabin or the hold, as long as the owner provides valid documentation and the pet carrier is deemed safe.

Ticket:  Regardless of the status of your dog, you must book your ticket with the airline directly (over the phone). You cannot purchase the animal’s ticket separately. If you are travelling with a Service Dog, you will have to provide a completed form from your personal physician that will be emailed to the airline prior to departure subject to approval. (Due to respiratory issues, flat-faced dogs are not permitted to fly).

Veterinary/USDA: You must book an appointment with your vet. They will facilitate the paperwork to be sent overnight to the USDA for approval. You will have to get a money order for USDA payment and include an overnight FedEx return envelope.

Carrier: You must have an airline-approved carrier, regardless of the status of your dog.

Customs: You will have to book an appointment with the custom’s vet in advance of arrival at Lisbon Airport. There will be a €40 fee.

We do not recommend procuring Emotional Support Animal (ESA) or Service Dog (SA) status if you intend to travel only once.  The airline may prove difficult. You will have to pay for the certification and physician’s sign-off which is similar to the cost of the pet’s plane ticket.

Service Dog status: As there is no accredited entity that supervises Service Dog certification, this status will not be recognized in the EU. Furthermore, there is no legislation that covers ESA so the airline might still charge for the ticket. That said, you can always travel with your dog in the cabin (if the dog falls under the airline weight limit).

Note: To be able to have the dog travel outside of the carrier, it must have the appropriate training (be able to remain calm for the duration of the travel – no barking, no peeing, etc).

Covid-19 restrictions

Currently, US nationals are not able to travel to Portugal simply on a US passport. If you are able to procure an exemption, you will not be allowed to travel with a pet in the hold (in-cabin only, in accordance with weight restrictions). Once the present travel ban is lifted, so will these limitations. If your pet is over the weight limit, it can be transported in the hold.

Advice on pet well-being

  • Be sure to exercise your dog in advance of travel. Fortunately, the US-PT flights are overnight, so the dog should already be primed to sleep for the duration of the flight. If you travel from JFK, Terminal 5 has an outdoor dog run which is right by the Lisbon departure gate. It is well worth it to book this route as it is a long flight and your dog will be stressed from the check-in/security process. The flight itself is 6-8 hours depending on wind. If you add the travel to the airport, check-in and luggage claim, security at departure and arrival with the custom’s vet, the whole procedure adds up to ±12 hours.
  • Do not feed your dog dinner (breakfast only). Use dinner as a slow-feed opportunity to calm your dog at take-off with any relaxation protocols you might already have in place. Toys and treats are very important for the duration of the flight. Bring a water bowl and allow for small amounts of water during the flight, as pets too get dehydrated. Be sure to manage intake since there will be no opportunity for pee breaks. Bring a pee-pad for emergencies to be used in the plane’s WC. It is highly unlikely that the animal will relieve itself in such an awkward setting, but if it is trained to go on command or it is clearly having trouble, this may be very helpful.
  • If you opt to medicate your dog, be sure to do a trial run well in advance of your departure so that you can mitigate any adverse reaction with the assistance of your vet.

Suzana Horta Greene is a dual US/PT national and flies frequently with her dog.

 

US Expats: Tax basics when living abroad

17 Monday Aug 2020

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Tax planning is an essential part of preparing to move abroad. You will continue to have reporting obligations and possible tax liabilities in the States based on your US nationality, in addition to the new requirements founded on fiscal residency in Portugal. As always, the IRS applies harsh penalties for non-compliance. The following is an overview of some of the basics for expats on federal and state taxes as well as estimated payments, penalties and interest. Fortunately, there is a bilateral tax treaty designed to protect you from double taxation. The accord can be used to mitigate or even eliminate assessment in the States while taking advantage of Portugal’s most favorable tax breaks,

Filing a Federal US Tax Return

All US citizens are required to complete an annual return when they live overseas. Other reporting requirements apply to US nationals as well, including FBAR (Foreign Bank and Financial Accounts) and FATCA (the Foreign Account Tax Compliance Act), that are triggered by meeting thresholds in foreign bank accounts and asset holdings.

Filing a State Tax Return

State income tax can also be a problem. Whether you need to file a state tax return depends on the last state where you lived. Some states have more complex residency rules than others, which means that these states may continue to consider you as a resident if in the state you own a property, possess a driver’s license, have bank accounts or an investment portfolio, are a registered voter, keep a mailing address, or have dependents who live in that state.

If you meet these criteria, you may need to submit a state tax return and pay state taxes even if you were absent during the fiscal year. Four of the more sticky states are California, New Mexico, South Carolina and Virginia. On the other hand, seven states charge no state tax: Alaska, Florida, Nevada, South Dakota, Texas, Washington State and Wyoming.

Most of the other states only require a state tax return when you were actually present in that state during the tax year. If you were, income tax is only due on earnings within the state. Because of the variability in different state requirements, you should confirm your own individual circumstances.

Closing or moving bank accounts, selling a property or changing your driver’s license to another state be steps that can help to sever the ties in your former state of residence.

Estimated Tax Payments

The IRS requires taxpayers to make quarterly estimated tax payments if the following conditions apply:

  • You anticipate at least $1,000 in federal tax in the current tax year after federal withholding tax and refundable credits; and
  • Federal withholding tax and refundable credits do not reach 90% of your current tax liability or are less than the total tax you owed in the previous year.

If you must make estimated payments, the reporting schedule is as follows:

Payment Period                         Due Date

January 1 – March 31                April 15, 2019

April 1 – May 31                       June 17, 2019

June 1 – August 31                    September 16, 2019

September 1 – December 31      January 15, 2020

You will not have to make the 4th quarter payment if you file by January 31 and pay the outstanding balance with your tax return.

Penalties

Two types of sanctions can be charged against expats who fail to pay their estimated taxes: “failure-to-pay” and “failure-to-file”. Submitting your federal tax return after the extended deadline can lead to a punitive “failure-to-file” penalty: 5% each month on the unpaid balance.

This charge is ten times the “failure-to-pay” fine. However, penalties are not allowed to exceed 25% of your total tax bill. If you are unable to pay all your taxes when due, reporting by the deadline is always preferable.

The “failure-to-pay” penalty is less severe: 0.5% monthly of the unpaid balance. “Failure-to-pay” fines begin to accrue on the day after the assessment is due. If you owe both penalties in one month, the maximum cumulative penalty in any given month is capped at 5%.

On the positive side, taxpayers living abroad get an automatic two-month filing extension.  Nevertheless, keep in mind that a filing extension is not an extension on paying outstanding taxes.

 

Update – New “visa” for US nationals visiting EU to start in 2021

13 Wednesday Mar 2019

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The EU Commission announced that American travellers will need a new type of “travel authorisation” – a European Travel Information and Authorization System or ETIAS – to visit the European Schengen Area beginning in 2021. Currently, US citizens can travel in Europe for up to 90 days with a valid passport without any visa requirements.

The new travel document will be valid for three years allowing for multiple entries into the Schengen Area. With ETIAS, travellers will need a passport, complete an online application and pay a fee of US$7. In most cases, approval should take only a few minutes.

News reports first called the process a “visa”, but authorities have been quick to clarify the semantics. Officials state that ETIAS is simply a “travel authorisation” for visa-free visitors, similar to the US system (Electronic System for Travel Authorization – ESTA) to screen people in the Visa Waiver Program (VWP).

UK may try to lead veto to EU blacklist

25 Monday Feb 2019

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As reported by the FT, the EU blacklist threatens to expose British overseas interests. If Great Britain abandons the European Union as scheduled, some UK territories may become candidates for possible inclusion in future versions of the “dirty money” list. The Americans are also unhappy with Brussels. The US seems more vexed about which territories appear on the blacklist rather than the practices that resulted in this “naming and shaming”. The deadline to form a majority to block the Blacklist is 12 March. The European Parliament is scheduled to vote its approval for the blacklist in the next week. It is improbable that the initiative can be blocked. Despite backing from France and renewed US pressure, it will be difficult for the UK to muster enough support to stop the update.

US imposes reporting rules on Delaware Companies

27 Friday Jul 2018

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Revamped rules for Delaware Companies create new reporting obligations for owners and eliminate any vestiges of confidentiality that once made these offshore structures attractive for many property buyers. Effective since the beginning of 2017, Delaware Limited Liability Companies (LLCs) that are wholly owned by a non-resident now become subject to specific US reporting requirements. The changes are intended to provide the Internal Revenue Service with improved access to information that it needs to satisfy its obligations under tax treaties, information exchange agreements as well as to strengthen the enforcement of US fiscal laws.

New and existing LLCs need to obtain an “EIN” (US Tax Identification Number) and, in the process, designate a Responsible Person (beneficial owner). The LLC is seen as foreign-owned Disregarded Entity which exists for legal purposes but not for income tax purposes. This is a fiscally transparent company, meaning the US tax authority will “look thru” the company structure and assess the responsible person (beneficial owner) directly for any tax due on Reportable Transactions (chargeable events).

Reportable Transactions are “any exchange of money or property between the LLC and its foreign member, such as sale, assignment, lease, license, loan, advance, contribution, or other transfer of any interest in or a right to use any property or money.”  For example, under these rules, a Delaware Company engaging in holiday lets or long-term rentals with their Portuguese property now has reporting obligations both in the US and in Portugal.

The LLC needs to maintain books and records of transactions to track any payments or transfers of money, property or other reportable transactions between the disregarded entity and its member, whether such operations are direct or indirect. These records must be available for inspection by the US Internal Revenue Service (IRS) on demand.

Reporting Transactions

Reportable Transactions must be declared on form 5472. Failure to file this form on a timely basis incurs a fine of $10,000. If the form is submitted on time but is incomplete or inaccurate, it is considered to be late and is still subject to the $10,000 penalty.

After an LLC is dissolved, cancelled or liquidated, it must file a final Form 5472, including any distribution of assets to its member. If the LLC changes status by electing to be treated as a taxable company, or adds members, becoming a partnership, it still must complete a final Form 5472.

Conclusion

Coupled with “look-thru” changes in Portuguese CGT legislation in the 2018 Budget governing the taxation of foreign companies holding Portuguese properties, these additional US regulations make life more complicated – and more expensive – for Delaware Company owners.

While the US may not be a co-signatory to the Common Reporting Standard (the international tax information sharing agreement between 105 countries worldwide), Uncle Sam has his own ways of tightening the screws when it is in the United States interest to do so.

Redomiciliation to Portugal continues to be the best long-term alternative to this increasingly complex conundrum in Delaware. While the walls continue to close in on Offshore Companies in general and Delaware LLCs in particular, Portuguese Nominee Companies continue to be a rock of stability in an ever changing world.

US nationals with money overseas

27 Monday Feb 2017

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Americans with financial accounts outside the United States should be careful to report it. Foreign financial accounts are high on the I.R.S. scrutiny list. Failure to disclose foreign accounts can be penalized severely. This includes people who inherited assets overseas as well as those who lived and worked abroad.

FinCEN Form 114, the Report of Foreign Bank and Financial Accounts is used for holdings of $10,000 or more and is filed electronically with the Treasury. Form 8938, which attachs to Form 1040, is used in more complex situations with $50,000 or more.