We are Murata Sogo Tax & Accounting Office, specializing in inheritance and international taxation, with an office in Miyakojima-ku, Osaka City.
In this issue, we would like to introduce a case in which an American (Japanese resident) owns a US LLC in the U.S., which we have been receiving a lot of consultations recently.

1. Case 

I am an American who falls under the category of a permanent resident of Japan and I own an LLC in the US. Since my work can be done online, I live in Japan and conduct it alone through the Internet. The U.S. LLC has elected pass-through taxation, so I do not file a tax return as a corporation, but as an individual.
In this case, what is the Japanese tax treatment?

2. Japanese Tax Treatment 

In Japan, the USLLC is treated as a corporation even if it has elected pass-through taxation in the U.S. The USLLC is treated as an individual taxpayer. If the USLLC is a one-person company and conducts all of its business in Japan, then it is considered a permanent establishment (PE) and should file a corporate income tax return in Japan.

(1) Japan National Tax Agency's Opinion on U.S. LLCs 

In principle, a U.S. LLC established in accordance with the LLC Act is considered to be a foreign corporation for Japanese tax purposes, given the following.

The LLC is a business entity formed in accordance with the LLC laws of each state in the U.S. for the purpose of conducting business 
・The entity is registered upon its formation 
・The entity itself is permitted to be a legal entity, such as a party to litigation 
・Uniform LLC Act provides that "[a]n LLC is a legal entity separate and distinct from its members. The Uniform LLC Act provides that “the LLC is a legal entity separate from its members” and “the LLC has the same rights and powers as an individual that are necessary and sufficient to carry on business activities. 

(2) Definition of Permanent Establishment (PE) under Tax Treaties 

Article 5 of the U.S.-Japan Tax Treaty defines a permanent establishment as ”a fixed place of business where a corporation Specifically, a permanent establishment is defined as a place of business management, a branch office, a branch office, or a branch office of a foreign corporation.
Specifically, a permanent establishment includes the place of management of the business, a branch office, an office, a factory, a workshop, a mine or other place where natural resources are extracted, and an agent authorized to enter into contracts.
In this case, the representative conducts business in Japan, so the business may be recognized as a permanent establishment as the place of business management is in Japan and the office is in Japan.

If the USLLC is found to be a Permanent Establishment, it will be obligated to file a corporate income tax return in Japan with respect to the income attributable to the Permanent Establishment. In this case, if a single representative conducts all business in Japan, all of the USLLC's income is considered to be attributable to the permanent establishment, and the USLLC is liable to file a corporate income tax return for all of its income.

 

In this article, we focus on a case that we have been receiving many inquiries about recently, in which a representative of an overseas corporation conducts business in Japan.
If you have any questions, please feel free to contact us through inquiry form.