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The tax treatment of the income of a U.S. LLC by a Swiss tax resident is specific and requires particular attention. The Federal Court has ruled that the LLC must be treated as a partnership for tax purposes.
In principle, from a tax point of view, partnerships are qualified by their transparency. Thus, according to Article 10 of the Federal Income Tax Act, each partner is taxed proportionally and personally on his share of the partnership's profits. Therefore, even if they do not actively participate in the partnership business, the partners receive independent personal service income.
Article 11 of the said law on foreign partnerships organizes a specific regulation, according to which foreign partnerships with an economic link to Switzerland are taxed according to the rules applicable to capital companies. However, in this case, due to the absence of an economic connection with Switzerland, the court omitted the application of this regulation. Thus, there is no clear answer as to whether a US LLC qualifies as a foreign partnership.
As a result, the court accepted that the LLC in question could be treated as a partnership for Swiss tax purposes. This decision is based on the development of the LLC in civil law and the tax treatment in the United States.
According to the court, the rules on LLC qualification are consistent with the U.S.-Swiss double tax treaty. Thus, double taxation does not exist in the United States.
In the case of a business activity carried out by the LLC and on the basis of the partnership characterization, the court characterized the LLC's payments to the Swiss resident partner as income from independent services under Swiss tax law. The decision shows that this characterization complies with the double tax treaty.
Furthermore, under Article 10 of the treaty, distributions cannot be treated as dividend payments in Switzerland. No U.S. withholding tax must be taken into account because of pass-through taxation in the United States. However, income from independent services is only taxable in Switzerland, unless the business activity is conducted through a permanent establishment in the U.S.
As a partnership, the profits of the LLC are allocated to the partners. Therefore, the LLC's profits are taxable in Switzerland when one or more partners are resident in Switzerland. On the other hand, the profits that are exempt from taxation in Switzerland are the business profits attributable to a permanent establishment in the United States. Moreover, the profit of the LLC is taxable to the extent that it is a pass-through entity. From a tax point of view, subsequent distributions should not have any consequences.
If there is no permanent establishment in the U.S., Swiss resident partners obtain independent service income, even if they are not intensively involved in the LLC's business. Depending on their residence in Switzerland, this results in a relatively high tax burden of up to 46%. Also, social security contributions of about 10% are applicable to the income from independent services, which are of a parafiscal nature when they exceed a certain threshold.
The profit of non-operating LLCs, which means LLCs engaged only in asset management activities, should also be taxable in Switzerland.
Our formalists are part of a preventive approach of your American tax obligations, within the framework of the tax returns of an American LLC. The perfect mastery of our specialists with regard to LLC taxes is the trademark of ExpertLLCUSA.com.
While the U.S. tax authorities may sometimes show leniency to a taxpayer acting in good faith, they certainly will not excuse willful fraud, failure to report, or late reporting of your LLC income. It is imperative for the taxpayer to be serious. That is why our staff is available to advise you on your current tax status and situation for your LLC USA.
Disclaimer: This document has been prepared on the basis of information available in the public domain and is for guidance only. All necessary precautions have been taken to certify the accuracy of the information. Notwithstanding, no legal liability is granted for any consequential incident that may arise from errors or omissions contained in this document.
