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19 December 2014

Overseas companies, part 4 - the LLC

In the USA, one of the most common ways of running a business or investment is via an LLC (Limited Liability Corportation).

Such a vehicle has a number of advantages, but these are not our concern here. The tax treatment in the USA is that, although the LLC is a separate legal entity to the owner(s), the income generated is taxed directly in the hands of the shareholders. This is therefore similar in nature to the House Company and Family Company, but without the various restrictions imposed on Israel.

The issue to be dealt with is that legally the LLC is a separate body. As such, Israel should tax shareholders only on the dividends (i.e. distributions). But since such distributions are not taxed in the US, there is no foreign tax credit to be given, even though the shareholder has already paid US taxes on the underlying profits.

The Israeli tax authority (based on a circular from 2004) therefore permit a person to elect to treat the income of the LLC as earned by the shareholder, and US taxes paid on that income can be credited against the Israeli tax due. However, this applies solely for the purpose of preventing double tax. As such, any losses incurred stay at the LLC level until subsequent profits wipe out the loss. This, despite the fact that in the US the LLC loss can be offset against other income in the year in which the loss in incurred.

Two further conditions apply for this election to be effective:

1. The election must be made in the first year that the LLC income needs to be reported.
2. The election cannot be revoked.

As always, personal circumstances will determine the best course of action, and individual advice must be sought.

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