How Trump will affect US entities for non-US residents?

What do LLCs, LLPs, S-Corps, and Partnerships have in common? They are all pass-through entities (simply: not subject to a corporate taxation).

Under a new Trump tax proposal, the pass-through entities status will be revoked and will be taxed at a 15% federal tax rate. Such plan will immediately transform all LLCs in the US into a corporation, as federal corporate tax is concerned. This however is to be compensated by switching the US to a territorial tax system.

First of all: at the time of writing, these proposals have not been approved nor been passed as a law yet. It has to go through many steps of debates, drafts and approvals. The full details of the reform is expected by the end of the year 2017. Until then, there are only 2 outcomes possible in case of a reform: a) the new taxation will favor non-US residents, or b) it will not favor non-US residents.

Let’s examine the outcome a):

This seems to be an impossible or unlikely reform: the first limited liability company act appeared in Wyoming in 1977 and was created by design to be a pass-through entity. Is it really possible that Trump’s plan close a 40 years practice and usage of such entities?… Let’s imagine that pass-through entities disappear, it will come back instantly into existence, one way or another. The most basic and wide-spread pass-through entity already in existence is: the sole proprietorship (73% of the business form usage in the US). A single member LLC is a defacto Sole Proprietorship. Would the 15% tax rate also applies to sole proprietorship? This is unlikely as it will be futile to have in existence both a personal income tax, and a corporate income tax; as everybody will just avoid the personal income tax rate by a simple registration. So Sole Proprietorship will therefore be out of scope of the 15% tax rate. The next day, any US state can enact a new “Sole Proprietorship Act” which will create a new business entity: the “SP” (Sole Proprietorship), having the same characteristics as a the current LLC and being pass-through.

Other pass-through entities that will remain: REIT, Mutual Funds, Unit Trusts, etc, because they are all investments vehicles and do not really generate profits (they just link investors and investments).

As far as territorial taxation is concerned: non-US residents LLC will therefore be required to disclose where profits arise, giving birth to new form returns & disclosures, new sets of rules & regulations… So even if this idea seems good on paper for non-US residents, it will certainly deter all current non-US residents LLC owners.

What happens in case of outcome b)?

We will have another jurisdiction ready to move all US LLCs out of the US.
If you are considering creating/incorporating such US LLC soon: you might hold off or contact us for an alternative jurisdiction.