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.
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 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.
Dennis Swing Greene is chairman and International Tax Consultant for euroFINESCOs.a. www.eurofinesco.com