As the world seemingly grows ever smaller, we frequently see clients seeking US tax advice, who wish to operate a US LLC from New Zealand.

Usually, the purpose of this is for US based sales, and with the intention of simplifying their situation as opposed to using an NZ company.

But, is this actually more simple, or a tax compliance headache?

Initial stages – Filing

As you might have already assumed, there are two different outlooks here when a client wishes to operate a US LLC from New Zealand. One position if the client is a US citizen, and one if the client is only an NZ citizen.

We’ll start with being an NZ citizen only.

For a Kiwi setting up a US LLC, this can create quite a complicated tax situation. In the US, a single member LLC (ie one owner) is automatically disregarded for tax purposes. This means that any income the individual earns, is deemed to have occurred in their own name. This usually is classed as self-employment income.

This can mean that a non-resident US tax return is now required in the US each year, to report the self-employment income generated.

For a US citizen on the other hand, a US tax return is likely already required to file a US return each year, and thus the self-employment income is added to their US tax return.

Depending on which state the LLC is set up, various state and city registration documents (or tax returns) may also be needed on an annual basis.

Will my LLC be taxed in NZ too?

This is where things can get very complicated.

In NZ, it is possible that your US LLC may be treated as a Controlled Foreign Corporation (CFC), meaning that it may be required to file forms with IRD, and report its income to IRD each year.

But I can take a Foreign Tax Credit in NZ for tax I pay to the IRS too?

This depends, both US and NZ tax advice must definitely be sought here.

In the US, the company may be treated as disregarded for tax purposes, meaning the income generated will be reported in your personal name, and tax paid in your personal name.

However, allowing company income to be disregarded (and taxed personally) is in essence, a tax benefit offered by the IRS to simplify reporting.

This may not always be reciprocated in New Zealand, and the company itself could be subject to NZ taxation, as opposed to you personally.

In this case, the tax paid in your personal name in the US, may not be able to be used as a foreign tax credit to offset NZ tax.

Usually, you can only take a foreign tax credit for tax that has been paid by the same entity (ie tax paid in personal name in one country, can be used as a credit against tax in personal name in the other country). If we have a case where the individual has paid the tax in the US, but the company has a tax bill in NZ, then we have a mismatch of foreign tax credit.

Again, to reiterate, this is a very complex area and US and NZ tax advice must be sought to arrive at a correct conclusion on the above situation.

Will my US LLC even be subject to tax in the USA?

Again, this depends on a few different factors.

Generally speaking, the US will tax income if it meets two conditions:

- The income is Effectively Connected with a US Trade or Business – Whilst no perfect definition exists for this term, it can be safe to assume that US based sales would account for this

- Permanent Establishment – This can be stock on the ground, an office, a staff member, or anything else indicating a physical presence of the business in the US

Without meeting these two conditions, then in some cases the US LLC may not be subject to US income tax.

Nevertheless, filing may still be required in both the US and NZ.

Should I sell goods to the US using my NZ company?

This again needs discussion, but in some cases it can be far more simple to do so. However, if the NZ company meets either of the two conditions in the prior paragraph, then a US reporting requirement can be created.

Summary

As you’ve likely established by now, operating a US LLC from NZ can be fraught with complication, and it is usually not as simple as the (many) online LLC establishment services can make out.

Both NZ and US tax advice should be sought before beginning this process.

At the US Tax Team New Zealand, we offer expert US tax advice, and partner with specialist NZ tax advisors to bring you comprehensive advice.

If you’d like to discuss further, reach out today – info@usatax.nz – 09-242-3445