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U.S.
L.L.C. Owned by a C.F.C.
QUESTION: I plan to become a
partner with a business associate with an LLC formed in the U.S.
However I
would prefer not to be listed directly with this entity, rather use the
Panamanian S.A. recently established ( Corp ) as my agent for this
pending LLC.
Is this practical? The LLC has been drawn up pending primarily this
issue. If
this is a practical concept, who would sign in place of me representing
the
Panamanian Corp?
REPLY: It's not at all
clear why you want to have a U.S. LLC owned by a foreign
corporation, but the following are some of the problems or
disadvantages that
occur to me.
The tax treatment of a domestic (US) LLC is as a partnership
if
there are multiple owners (or as a disregarded entity where there is
only one
owner). The part of the income of a U.S. partnership that is
owned by a
foreign person (or company) is subject to a 30% withholding tax on
distributions
to the foreign partner.
A Panama S.A. corporation is treated as a foreign corporation and if
more than
50% of the stock is owned by five or fewer U.S.
persons it is treated as a
controlled foreign corporation (CFC). Income of a CFC is subject to
current U.S. tax by
the U.S.
owners who own 10% or more of
the CFC.
If any income of the U.S. LLC might be subject to favorable tax
treatment (such
as qualified dividends, capital gains, business losses, loss
carryovers, etc.),
the income allocated to the foreign corporation would be converted into
ordinary income and most losses would be tax deferred until the foreign
corporation was liquidated. If the U.S. LLC has any kind of investment
in U.S.
real
estate, additional tax complications arise and many of the tax benefits
of real
estate are not available for a foreign partner.
As for who would sign documents in your place as the owner of the Panama corporation, you could hire and
appoint
an officer of the Panama
corporation to do that. But you would still have to disclose your
ownership
interest in the U.S. LLC by filing a Form 5471 for the Panama
Corporation.