In the US, a Limited Liability Company (LLC) with at least two members is classified as a ‘partnership’ for federal tax purposes. However, an LLC with only one member is treated as an entity disregarded as separate from its owner. An LLC’s tax classification can subsequently change under certain conditions, for example, when it elects to be treated as a corporation under the US ‘check the box’ regulations.
The US authorities treat a disregarded entity as ‘fiscally transparent’. If the owner is a US tax resident, the single-member LLC’s activities (e.g. income, deductions, gains, losses, and credits) should be reported on the individual’s federal tax return. The owner will not be considered an employee of the LLC but will be self-employed in the same manner as a sole proprietorship. Any distribution from a disregarded entity will have no corporate tax implications in the US because the assets transferred are deemed the owner’s assets for tax purposes.
Because countries take different views as to when an entity is fiscally transparent, international tax issues may arise. Generally, a fiscally transparent entity is not entitled to claim tax treaty benefits, which can result in either double taxation or double non-taxation when earnings are distributed to a beneficiary abroad. For Belgian tax purposes, there is a standard practice of treating US LLCs as companies (with legal personality), rather than as transparent entities.
If you are the owner of an LLC classified by default as a disregarded entity and you are a Belgian tax resident, you will obviously want to know how your LLC’s earnings (as a ‘hybrid’ entity) will be treated for tax purposes. Except for a few Belgian tax rulings, there are little or no administrative guidelines and tax court decisions which specifically address US LLCs.
Because a US LLC is considered a separate legal entity in Belgium, the Belgian tax administration will not tax any of the LLC’s earnings if they are reserved and not distributed to the owner. If the LLC does make a distribution, it is generally upheld that the Belgian resident owner is entitled to the US-BE tax treaty benefits. If the LLC’s earnings are taxable in the US, Belgium must exempt the income (under the ‘exemption with progression’ method as business income). In the situation where the LLC’s earnings are considered taxable in Belgium (permanent establishment), such earnings would be subject to the Belgian Income Tax for Non-Resident Companies. The Belgian resident beneficial owner should not be taxed individually on these earnings.
As the difference in approach might also result in income classification issues, it is generally accepted that −under tax transparency− Belgium is bound by the classification given to the income by the state of source (US). If it is a dividend in the US, it will be treated as such in Belgium, and so on.
It also needs to be mentioned that if you are a member of a US LLC, you must always report this ‘legal structure’ in your Belgian tax return in view of the so-called ‘Cayman tax’. TAXPATRIA® can assist you with analyzing the Belgian tax liability of your US LLC and make sure you are fully compliant with local regulations.