Taxation of single person US LLC of agency owners and freelancers when the owner is resident of India- Analysis of the Indian side- Part 2

[tomwedding]

And I am back with the part 2

For those who did not read part 1: Link

In the last part I explained why US LLC will not be taxed in USA.(Such a misleading term, I know!)

In this one, I will explain it's responsibilities in India.

A quick recap of the most essential part:

The single person LLC owned by an Indian Tax resident will be classified as "disregarded entity" by default for TAX PURPOSES ONLY. This means the IRS(the US Income Tax) will consider the US LLC as the same person as the Indian Tax resident for TAX PURPOSES.

This means two things:

1. In the US, same compliance will apply to you as it would to a non resident Individual.
2. Any tax withheld by your clients in USA will be credited to your PAN Account.( Tax withholding can be avoided by filing the Form W-8BEN or form 8233 with the client)

~~~~~~~~~~~~~

Now onto this episode of our Anime.

~~~~~~~~~~~~~

INCOME TAX

For Income tax, your taxation will be same as individual resident. Hence, the income earned in USA will be added to your total income AND:

1. It will be covered under 44ADA if you provide Software consultancy, legal, accounting or other notified services under Section 44AA(1).
2. It will be covered under 44AD if you provide any service not notified under 44AA(1).
3. If you cross the limits of turnover under any of the these schemes(ie 75 lakhs or 3 crores), you will have to undergo tax audit.

Thus, your taxation will actually be pretty much unaffected, and it does not add a lot of additional compliance( Big sigh of relief!). However, this is the additional compliance you will have to do:

1. You need to take note of your foreign assets and declare the same to Income tax department at the time of filing ITR.
2. You need to claim tax credit of any taxes paid in the USA.(potentially major issue)

The potentially major issue: The issue here is that Indian Tax system is quite generous with small businesses. You only have of declare 50% of your profits as taxes under 44ADA and only 6% of your profits under 44AD as freelancer(depending on whichever is applicable to you). In other words your effective tax percentage is going to be 15%(44ADA) or 1.8%(44AD). Crazy! I know!

However, you will be taxed at 30% in the USA(for withholding). Hence, if all of US income was taxed at 30%, you will have paid extra tax. FOR SURE. And here is the worst part, you can claim the rebate for taxes paid UP TO the percentage applicable in India. Hence, you will only be able to claim 15% or 1.8% as applicable out of the 30% you paid.

Two potential solutions:

1. Claim exemption from withholding by filing the appropriate form(W-8BEN)
2. Claim refund of withholding taxes in USA by filing appropriate tax returns.

And now you are armed with the knowledge you need to file Income taxes in India.

~~~~~~~~~~~~~

GST

Similar to the Income Tax filing, the GST filing is also going to be same as it would be without a US LLC. And here is why:

As per Section 2(71) of the GST act, the location of supplier of service shall be either of:

1. The registered office.
2. The fixed establishment from where supply is made.
3. The fixed establishment most directly connected with supply(in case of supply from multiple places)
4. The usual place of residence of supplier in rest of the cases.

The important fact to note here is that it is nowhere mentioned that section does not talk about "Address from where Invoice is raised". Hence, even if you raise invoices from US LLC, the place of supply for GST purpose shall still be considered as India, as long as you are an Indian Resident.

Another point to note is that as per section 2(105), "supplier" means the person supplying goods or services. Hence, the invoicing address is irrelevant to determine the "supplier" and "location of supplier"

Hence, for GST, the compliance will be same as it would have been, if there was no US LLC.

And that is all for this two part series.

Let me know your thoughts.

I would love to hear your suggestions related to topics that I should cover in future.

Cya.- @tomwedding

 

[asdtmr12]

@tomwedding I’d be eager to hear more about how one can open a brokerage account via the LLC and trade in futures and stock options since the establishment of an LLC makes it legal.

The liabilities, fees, and extra caution that would go into setting this up via an LLC - (stuff that isn’t already covered in the basic broker - individual contract wrt fees, fiduciary responsibilities and FATCA)

Also, you should put up the recurring fees ( reporting fees) of the LLC that are required to be paid yearly for at least some of the states in your previous post. I just learned about this based on the link you shared with me in a comment and it would be helpful for others as well since no one else is touching the subject of LLCs.

 

[shepaintedlove]

@asdtmr12 IIRC you can trade options if the money is not sourced from India. You don’t need an LLC for that. Just have your clients send money to your broker’s account.

 

[cherrein]

@shepaintedlove

Just have your clients send money to your broker’s account.

Most brokers require the remitters name to match the account title. You might be able to open a brokerage account remotely but you won't have access to a checking or cash management account.

 

[shepaintedlove]

@cherrein That's the case for withdrawing money from the brokerage account, not for depositing. I've personally been doing this since two years with TDA and Schwab.

 

[asdtmr12]

@shepaintedlove Doesn’t creating an account with the broker require a residential address, an SSN, a country specific phone number and documents verifying the same?

And I’d rather have the process of withdrawing clear and understood as well before depositing anything.

How do YOU personally plan on withdrawing your money?

 

[shepaintedlove]

@asdtmr12 SSN, residential address, etc. aren’t required for international accounts. I personally haven’t lived in the US and don’t have an address there.

I can wire the money to any account (Indian, US or otherwise). And it’s not a plan, I created an account two years ago and have been doing this ever since.