Below is the Tax Court of Canada’s holding that a Delaware LLC owned by indirectly by a Canadian company creates the ultimate international tax haven company. This case makes it clear that any American LLC gets treaty benefits including those LLC’s that have no US taxable income. The Delaware LLC could have just as easily been owned by a tax haven company. Here is a case summary with some additional tax planning afterwards.
In TD SECURITIES (USA) LLC, Appellant, vs HER MAJESTY THE QUEEN, Respondent, a Canadian corporation formed a Delaware single member limited liability company (TD LLC) owned in turn by another Delaware corporation.
Next, it had TD LLC operate a business in Canada. The business is was a virtual business (see our article at this link). So, while it had a business in Canada it did not have a “permanent establishment.”
Canada taxes this type of a business as a branch at 25%. However, under the US-Canada tax treaty, US branches are taxed at 5%. The Pay off? In this case, a great foreign tax credit. In other cases, complete absence of taxes. Our LLC’s can be used in many ways to save taxes on cross border income.
So, the big big question is a disregarded LLC a branch of a US business? Remember, the LLC is owned by a US corporation which in turn is owned by a Canadian corporation. Yes, it is a branch of itself and not a branch of its owner.
So, where is the IRS? Where is should be…. out of the picture. For American taxes, TD LLC does not exist.
Only America sees an single member LLC as non-existing. The United Kingdom Inland Revenue posted a blog saying an American LLC is a corporation of U.K. tax law. Canada agrees!
TD LLC is an American corporation headquartered in the tax haven state of Delaware (V.P Joe Biden’s home state…hum). TD LLC’s sole activity is a branch in Canada. As a United States person the LLC qualifies under the Income Tax Treaty.
Ironically, Congress is passing a no treaty shopping tax law for foreign persons investing in America. Meanwhile, we have a domestic foreign trust law and our non-existing LLC laws.
Now, this is not the only way to use the USA as tax haven. Here is a link to our video article America the Worlds Best Tax Haven
The international classification has caused confusion in Australia (who has much of our 1986 Tax Act). Here is an article that shows the complete chaos and different opinions.
In the TD case, three expert tax witness had three different explanation of the LLC in cross border tax planning. The Lesson- Always get an IRS ruling.