We are a small clothing business in California selling shirts and beach wear. We want to set up a manufacturing relationship in India. We have an opportunity to have an Indian business partner and were wondering the best way to set up our company from a tax perspective. Any ideas?
Tax Professional Answers
After the LLC is established, prepare or have prepared an Organizational Agreement defining the relationship of all parties. Many of the terms associated with the Agreement can be found on the internet so if you have one drafted compare it to the ones you will find easily on the internet. Partners in an LLC do not have to have equal ownership but only have a defined percentage of ownership which is stated in the Organizational Agreement.
You partner from India can then be given a K-1 as each owner will be showing that partners share of income revenue, Sec 179 depreciation etc.that each is responsible for. You then would each file your own individual tax forms with the India partner filing a 1040NR form as a none resident.
There is a tax treaty in force with India which would limit taxes of interest and dividends to 15%. We might be able to improve upon this with a little bit of shopping. There are a number of jurisdictions where an off-shore holding structure (zero tax) can be used to hold shares.
Would prefer not to go further into this topic in a public forum. Let me know off-line if you need specific advice.
As a US citizen I would advice that you establish a JV company in a jurisdiction which has good tax treaty network., both with the US and India. The JV company needs to be financed therefore the choice of jurisdiction is important to limit tax on interest.
The JV company should establish the branch in India, through which the manufacturing will be conducted. Your US company will buy from the JV, ensuring that the price is sufficient to avoid transfer pricing issues .
Once the relationship is ended liquidate the JV and repatriate any capital gains accordingly.
Why you should use a JV? a JV keeps the two business interest apart and ring-fence any possible attack against your US assets, subject to you getting the Shareholders agreement drafted correctly, don't just rely on the statutory documents of the company. The JV would also remove any US filing requirements for your Indian partners
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