LLCs Are Not Straightforward

Your taxes

‘IT CAN be off-putting and cumbersome to be asked for money in various social settings, even if it is for an objectively good cause.’ (photo credit: PXHERE)
‘IT CAN be off-putting and cumbersome to be asked for money in various social settings, even if it is for an objectively good cause.’
(photo credit: PXHERE)
The second half of August saw a lot of empty parking lots as Israelis took their kids on vacation. But the Israeli Tax Authority (ITA) and the courts don’t seem to have rested. A hot area concerns the use of US limited liability companies, or LLCs.
An LLC in brief
For US tax purposes, LLCs are typically transparent flow-through entities, meaning the LLC generally isn’t taxed but the members (shareholders) are. For Israeli tax purposes, to avoid double taxation, such transparency should be elected in the first relevant annual Israeli tax return by invoking Israeli Tax Circular 5/2004. Otherwise, the IRS and ITA may scoop up most of your LLC gains. The combined tax burden can approach 60%-70%. Moreover, the estates of non-US investors in an LLC who are not US citizens or green card holders are exposed to US estate tax should they meet their maker. The LLC offers no protection. Always check out LLCs before and after investing in them with advisers in each country.
LLC and wallet company rules
The Israeli wallet company rules aim to tax at regular personal rates (up to 50%) owners of private companies that are used to:
1) Provide personal services of a managerial or employment nature, or
2) Allow company owners free use of company assets, such as a company home.
The ITA has published a tax ruling (3748/19) dealing with an Israeli resident couple who enjoyed the use of a vacation home in the US which they held via a US LLC. This was done for US legal reasons. Was the value of the US vacation home taxable in Israel under the wallet company rules at rates ranging up to 50%? In this particular ruling, it transpired that the couple financed the acquisition of the vacation home by lending money pursuant to a five-year dollar loan note to an Israeli “family company” (also transparent for Israeli tax purposes). The family company lent the money onward, back to back, on similar terms to the LLC. The LLC was transparent according to an election under Circular 5/2004. In the circumstances of the ruling, the ITA decided that the vacation home taxable amount was reduced by the loan note to the LLC.
Aggressive loss claims
The ITA has just won a case in the Israeli Supreme Court in which the taxpayer tried to artificially offset a loss from an Israeli “family company” against a big gain generated by an LLC in the US (Kfar Saba Tax Office v. Yadin, 7481/17 of August 26, 2018). The loss was a paper loss only from an investment in a multi-year combination deal (joint venture) that had not yet made a profit. The taxpayer sought to turn it into an actual loss by selling the investment from one company to another owned by the taxpayer at a low price.
The Supreme Court ruled this was artificial because:
1) The two companies were under common control,
2) The timing close to the LLC gain was too convenient,
3) A tax saving would have resulted, and
4) The court did not accept the taxpayer’s stated reason that the transferor company couldn’t give collateral needed by the joint venture.
To sum up
LLCs may be good for US taxpayers unless they also happen to be Israeli taxpayers. Don’t skimp on your homework!
As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.