Lots of clients automatically think offshore when looking to operate in freedom and optimize for tax. However, the UK, Canada and US all have entities that are cheap to form, easy to run and have no tax on foreign income. We took a closer look.
Operating from offshore is in many ways stigmatized, not only in the popular press but also by many service providers who will deplatform your business if it is not set up in one of the main, often English-speaking countries.
This ranges from crypto exchanges to payment providers to banks.
For digital businesses, these service providers are a lifeline but most, including crypto facilitators such as Wyre and crypto-friendly banks such as Mercury, limit their services to entities based in the UK, Canada and the US.
Luckily there’s a legit hack which will let your digital business process payments tax free and at lowest cost.
The hack is to register a UK, Canadian or US payment processing company. If such entity is a pass-through entity for tax purposes, its profits will simply flow to its parent company where it is taxed depending on where that parent is based.
Typically, such pass-through vehicles are either partnerships, such as the UK and Canada Limited Liability Partnership (LLP), or operate like partnerships, such as the US Limited Liability Company (LLC).
Let’s have a closer look at this trio.
A UK LLP can operate tax-free at the entity level provided its Partners are based outside of the UK.
As such, the LLP generally has no tax of its own. Rather, its Partners are responsible for their share of the profits at the personal level.
This means that to assess the tax position of the LLP, one needs to look at the personal tax situation of its Partners.
If such Partners are not resident in the UK, they are only liable for UK taxation on UK-sourced income in the LLP, not foreign income. This means that the LLP could be used for all sales from outside the UK and not be taxed on its profits at the UK level.
If in addition the Partners are resident in a place which has purely territorial taxes (such as Singapore or Hong Kong vs. worldwide tax places such as the US) they will not be personally taxed on the income they receive from their UK LLP.
There are finer points regarding what could be considered UK-sourced income. However, as a general principle, if the business has no UK operations (employees, clients, etc) and its Partners are non-resident, the business is legitimately outside of the UK tax web.
This makes the UK LLP a good choice for non-UK based business owners and comes with the added prestige of being incorporated in the UK.
For some, the downside of a UK LLP is that the names of its Partners are visible and searchable on UK’s Company Registry, so the setup is not private.
Also, by definition, a Partnership needs at least two partners, so solo-entrepreneurs will need to find somebody willing to step in.
However, the Partnership agreement can be structured such that the second Partner only holds a minority stake. In any event, the payouts from the Partnership do not have to be equivalent to the size of each Partner’s stake but are subject to an annual (or quarterly or any other interval) decision amongst the Partners, e.g. I can be a 20% Partner in your LLP but only receive 0.1% of its dividends.
Finally, most neobanks in the UK are wary of non-UK owned LLPs: even though they do open bank accounts for LLPs, they often only do so if the Partners are physically based there and will require a proof of address of all Partners with more than a 25% stake at the stage of KYC.
The same applies for services such as Revolut who discriminate between UK owned and non-UK owned LLPs.
British Columbia LLP
Many former colonies of the British Empire have traditionally modeled their company laws on the UK’s and Canada (with the exception of Quebec) is no exception.
The LLP is a recognized pass-through vehicle in Canada however some Provinces reserve the LLP form for professional service providers such as lawyers or medical practices.
Not so in British Columbia where the LLP is a well-kept secret amongst practitioners:
- It is private in its setup with no public record of its Partners, who can be natural persons, legal entities or a mix of both.
- Banks are pragmatic at account opening and generally don’t treat non-Canadian owned LLPs discriminatorily. Banking is by default in both CAD and USD, making it an ideal vehicle for USD-based businesses without being in the US. However opening a bank account will require a visit.
- Tax-wise, there is an assumption that if the LLP’s Partners are not based in Canada, revene from the B.C. LLP is not sourced in Canada, making the burden of proof of what counts as Canadian and non-Canadian sourced income easier. Even selling goods or services to Canadians from abroad via a B.C. LLP is usually not deemed as conducting business in Canada and hence not a taxable event in Canada. (However there are nuances and this is *not* tax advice).
- The B.C. LLP is easy to maintain: If no business is conducted in Canada, and all partners are non-residents, no tax liability will exist in Canada and no return will have to be filed. Only an annual report must be filed with the B.C. registry, merely confirming that all company information is still accurate.
- All major service providers will cater to a Canada LLP incl. TransferWise, Stripe, Braintree etc. and settlements can be received in both CAD and USD, making it an ideal solution if you sell goods or services in USD and do not want to have to convert your sales proceeds. Basically you can completely bypass the Canadian dollar.
Perhaps the only downside of the B.C. LLP is that it cannot be formed online so you will need a service providers such as Otonomos to file on your behalf! You will first need to reserve a name for your LLP before you can incorporate it, and we can provide its registered address in Vancouver.
The Wyoming LLC
Finally, the US LLC works broadly in the same way as the UK and B.C. LLP above and is arguably even business friendlier.
To many, it may come as a surprise that the ultimate offshore characteristics of privacy and tax-optimization may be found in a US entity.
However, certain States of the U.S., particularly Wyoming, have superior business and asset protection privacy law. Wyoming is also one of the few States with no corporate taxation.
On the privacy side, unless Members chose to disclose who they are, ownership of a Wyoming LLC is not on public record and can be set up such that who owns a Wyoming LLC is only known to the owners themselves (or their registered agent such as Otonomos if they use one).
Being in the U.S., this means Wyoming is spared the disclosure and exchange of information pressures offshore havens are now under, including the OECD’s Common Reporting Standard, which requires all financial institutions to collect and share financial data on their customers with the relevant tax authorities but which the U.S. has made clear it has no interest in signing up to.
In addition, the U.S. is consistently uncooperative when it comes to sharing information on non-U.S. citizens or residents with other countries’ tax authorities (even if the U.S. expect foreign authorities to co-operate in sharing information on its citizens…).
Finally, since Wyoming has no state-level corporate taxation, it does not require companies registered there to file a tax return, only an Annual Report which does not require disclosure of the ownership structure. Perhaps more importantly, if no work is physically performed from within the U.S., there is also no need to file a federal tax return with IRS. As things stand, businesses that only transact in crypto will also not need an Entity Identification Number (EIN) from the IRS, however an EIN will be required to open a bank account for the LLC.
This means that a Wyoming LLC with no “Effectively Connected Income” in the U.S. generally has no U.S. tax burden. This makes it the top contender as best jurisdiction to base a location-independent business from, or to hold crypto assets in, provided you do no reside in the U.S. or are a U.S. citizen.
It is for this reason that our otoco.io onchain company assembler lets users form an instant Wyoming LLC as the ultimate freedom tool for anybody to do business from anywhere via an LLC incorporated there.
As we have seen, the pass-through nature of the UK LLP, the B.C. LLP and the Wyoming LLC means profits at the company level need to be accounted for in the tax return of their owners (the Partners in the case of the LLP or Members in the case of the LLC).
Making another entity rather than a physical person the owner therefore opens interesting possibilities.
If such entity is registered in a jurisdiction that has no tax or only territorial tax the profits that flow to the subsidiary’s owner could be exempt from any tax.
This “combo” of an LLP or LLC owned by a tax-optimized parent offers interesting possibilities e.g. for crypto trading: the subsidiary (say a Wyoming LLC) can hold an account with crypto exchanges (e.g. Coinbase Pro in the US), trade and book profits, and send those up to the parent where they can accumulate until they are being distributed.
At that moment of distribution, the tax situation of the parent’s owners will then decide what gets taxed where, but given that it is a dividend rather than income, any tax should be at a lower rate.
The subsidiary can also be used to offramp crypto into a bank account which, even if held in name of the subsidiary, is part of the asset (and tax) base of the parent.
Further permutations would for a Trust or Foundation to be the owner of an LLC or even let a DAO control the LLC. The latter could then act as the “executive arm” of a Trust, Foundation or DAO, doing revenue-generating stuff in the real world which gets passed through to its owners.
You Only Live Once etc., and life is arguably too short to spend too much time on optimizing tax.
But a pass-through vehicle in one of the above jurisdictions may be the solution you need if you run a truly location-independent business but don’t want to deny yourself access to first-world crypto and fintech infrastructure.
It is also an entirely legitimate way to simplify your tax on international revenue, depending on where you are based. By spending only a couple of hundred, you could save thousands to reinvest in your business.
Feel free to book a FREE 30 minutes call with Otonomos to see how we can help.
This is not tax advice. Please do not try this at home.