Many international businesses choose to incorporate in certain US states like Delaware, Nevada, and Wyoming because of their favourable business regulations. Delaware and Nevada, in particular, allow incorporation and tax benefits without requiring one to be domiciled there or operate the registered business in the state. In this guide, we will focus on Delaware tax filing for international companies, specifically LLC and C corp company structures.
WHAT ARE DELAWARE HOLDING COMPANIES?
A holding company is a company that holds more than 50% of the equity of another business, giving it the power to manage the activities of the latter. Like any other holding company, the Delaware Holding Company holds other companies and does not conduct any substantive day-to-day business activities of its own.
The most common types of holding companies established in Delaware are:
- Investment holding company: This company exists with the singular object of holding investments and stock in other incorporated entities.
- Management holding company: A management holding company manages the operations of one or more subsidiaries. Due to its capacity to lower taxes and decrease liabilities for businesses, this sort of holding corporation is popular in Delaware.
- Holding company for intellectual property: This type of holding company possesses patents, trademarks, and other forms of intellectual property. These holdings are used to create income through licensing and other types of royalty payments.
DO COMPANIES PAY TAXES IN DELAWARE?
Although Delaware generally requires companies to pay taxes, holding companies are often formed there due to the incentives offered by the state income tax law. The law allows foreign companies not formed under the laws of the State of Delaware to be partially tax-exempt.
Under the tax code of Delaware, holding companies that operate within the state’s jurisdiction and are registered in accordance with the Investment Company Act of 1940 as investment companies may be exempt from corporate taxation. This liberal tax treatment has led to the enthusiasm of businesses to incorporate companies in Delaware. These companies are often viewed as tax-exempt entities that would hold intangible assets, including but not limited to stocks, bonds, patents/patent applications, trademarks, trade names, trade secrets, etc.
DELAWARE COMPANY TAX GUIDE FOR NON-RESIDENTS
When a corporation is established in Delaware, whether as a resident or non-resident, it will be subject to the same taxes as other corporations on the income sourced from the United States (U.S). However, a Delaware LLC formed by a non-resident will only be taxed on its US-sourced income. Thus, income sourced from other countries, including the non-resident’s actual country of residence, will not be subject to tax in the U.S.
The applicable tax rate is set at 30%, and the IRS receives this 30%. When filing your US taxes at the end of the calendar year, you must submit Form 1040-NR with the actual amount owed. The IRS will give a refund for the amount overpaid if the amount owed is less than the initial 30% taxed. Additionally, the LLC is required to appoint a tax withholding agent to determine the correct amount that must be remitted to the IRS before any of the money is released. This ensures that the LLC pays the right amount to the IRS. Due to these challenges, many non-residents of the United States opt to create corporations, unless they are creating an LLC specifically to conduct business outside of the United States, in which case the LLC would not be subject to U.S. taxation
TAXATION FOR LLCS IN DELAWARE
The taxation of an LLC in Delaware can take different forms. Where the LLC is a single-member LLC, it may either be treated as a corporation or a single-member “disregarded entity” for tax purposes. For the purpose of taxation, Delaware laws treat single-member “disregarded entities” as sole proprietorships. The effect of this is that the LLC does not pay taxes and will not be required to file returns with the State. Where the single-member LLC has opted to be treated as a corporation by filing the required forms, it will be taxed as a corporation.
In other instances where the LLC has multiple members, it is generally treated as a partnership. This is the most common method of taxing LLCs in Delaware. Under this model, the LLC is not subject to federal tax. Instead, the profits and losses of the LLC are “passed through” to its owners. The appropriate distributive share of the income or loss of the LLC is allocated to each member and will be claimed on their individual income tax returns.
Also, an LLC incorporated in Delaware but does not operate physically in the jurisdiction is only required by law to pay a flat rate of $300 per year franchise tax due on June 1 every year. The tax becomes due every year that the LLC remains in existence, notwithstanding whether the business made any profit and without any reference to its level of activity or inactivity. Even when the LLC is cancelled during a year, the LLC is still required to pay the franchise tax for that year regardless of the date the LLC is cancelled.
TAXATION FOR C-CORP IN DELAWARE
In a C-Corp, the entity is treated as a separate entity from its members. Where the members of an LLC choose to be treated as a C-Corp, they may be subject to a form of “double taxation”. This means that the LLC will be required to pay taxes on its income (subject to allowable deductions), and its members are also required to pay taxes on whatever distributions are made to them by the LLC. Unlike what obtains with the taxation under the partnership model, the taxation of the income of the LLC is not passed through to the owners. Instead, the distributions made to members are taxed as the income of the members where necessary.
Delaware offers a favourable business environment for international businesses, with liberal tax treatments for holding companies and tax exemptions for LLCs conducting business outside of the US. Whether you own an LLC or a C corp in Delaware, you can easily file your franchise taxes with Norebase. Click here to get started