Tax-Free with a US LLC and Cyprus Limited: The Best Setup for Relocators
Are you living in Cyprus or planning to move your tax residency there?
With the proper structure, combining a US-based LLC and a Cyprus Limited Company can allow you to receive income legally and sustainably tax-free.
In this article, we'll explain how this setup works, the potential tax risks involved, and how a well-designed holding structure can help you avoid costly pitfalls.
Summary of Key Points:
- A US LLC can be a highly flexible and tax-efficient tool for expats, mainly when used as a Disregarded Entity.
- In Cyprus, profits from an LLC are treated as dividends. For individuals with Non-Dom status, these dividends are exempt from taxation.
- However, suppose there's no genuine business presence abroad. In that case, your home or residence country may assume a fictitious permanent establishment, which can trigger unintended tax consequences.
- The solution: Using a Cyprus Limited as a holding company for your LLC establishes a clean legal structure and helps avoid international double taxation.
Table of Content:
- What Exactly Is a US LLC?
- Tax Treatment of LLC Income in Cyprus
- The Solution? A Cyprus Limited as Holding Company
- Conclusion: Tax-Free, Compliant, and Secure
What Exactly Is a US LLC?
A US LLC (Limited Liability Company) is a popular business structure in the United States, widely used for its flexibility, limited liability protection, and favorable tax treatment.
An LLC combines characteristics of both corporations and partnerships. It's suitable for solo founders as well as multiple owners (called "members").
Legally, a US LLC is a separate legal entity, offering its members limited liability protection, similar to that of a corporation. But for tax purposes, it's typically treated as a pass-through entity:
- If there's only one member, the LLC is usually treated like a sole proprietorship.
- If there are multiple members, it's treated like a partnership.
In both cases, profits and losses are distributed to the members and taxed at the personal level. No corporate income tax is due at the LLC level, unless a different tax classification is chosen (e.g., electing to be taxed as a corporation).
LLC Formation Options
A US LLC can be set up in various forms, depending on the ownership structure and registration approach:
- Single-Member LLC – with just one owner (this can be an individual, a company, or even a partnership)
- Multi-Member LLC – with two or more members
- Domestic LLC – formed in the US state where it operates
- Foreign LLC – formed initially in one US state but registered to do business in another.
Important to know: LLCs are formed at the state level, not at the federal level.
This means that rules, fees, and compliance requirements vary depending on the state you choose.
One major advantage: Non-US residents can form an LLC entirely remotely. Popular choices include Wyoming, Delaware, and Florida. This states are known for their business-friendly legal frameworks and low administrative burdens.
The “Check-the-Box” Rule
One of the most important tax features of a US LLC is the "Check-the-Box" procedure provided by the IRS (Internal Revenue Service). This allows LLC owners to choose how their company will be taxed:
- By default, a Single-Member LLC is treated as a Disregarded Entity, meaning it is not taxed as a separate entity.
- A Multi-Member LLC is automatically treated as a Partnership.
- Alternatively, an LLC can elect to be taxed as a Corporation, or even as an S Corporation (if eligible).
This election is made by filing IRS Form 8832 (to be taxed as a Corporation) or Form 2553 (for S Corporation treatment).
This flexibility makes the US LLC particularly attractive to international entrepreneurs, as the tax setup can be adapted to the specific business model.
Important: The decision on how the LLC is taxed should always take into account the owner's country of residence, any double taxation agreements (DTAs), and the relevant local tax laws.
Choosing the wrong classification can unintentionally trigger international tax liabilities, many of which are easily avoidable with proper planning.
In the following sections, we'll focus specifically on the Single-Member US LLC owned by an individual, as this is the most common structure used by non-US residents.
Tax Treatment of a Single-Member US LLC for Non-US Residents
The tax treatment of a US LLC depends mainly on two key factors:
- How the LLC is structured (Single- or Multi-Member, and the tax classification selected)
- Whether the LLC generates US-source income, also known as "U.S. trade or business" or "effectively connected income (ECI)."
For a Single-Member LLC treated as a Disregarded Entity, the following rules apply:
If no US-source income is generated:
- The LLC is considered fiscally transparent for US tax purposes.
- That means: The IRS does not treat the LLC as a separate taxable entity.
- If there is no business activity or income from within the US, no US tax is due.
- However, there may still be registration requirements, for example, with US banks or payment processors.
- Since 2017, there's also an annual reporting obligation:
- You must submit IRS Form 5472, along with a pro forma Form 1120, even if no tax is owed.
If US-source income is generated:
- Suppose the LLC earns income from US sources (e.g., selling on a US marketplace like Amazon FBA). In that case, it is considered effectively connected income (ECI).
- This income is taxable in the United States, and you are required to file a US tax return (Form 1040-NR, often accompanied by Schedule C).
- You'll also need a Taxpayer Identification Number, either an ITIN or EIN.
- In some cases, withholding taxes may apply (e.g., on dividends, interest, or royalties).
Important: Only the US-source income of the LLC is subject to US tax.
All other income must be declared and taxed in the country where the owner is tax resident or has their habitual place of residence.
Tax Treatment of LLC Income in Cyprus
The US LLC as a legal structure does not formally exist under Cypriot company law.
Therefore, Cyprus must determine how to classify income earned through an LLC for tax purposes. In practice, there are only two possible interpretations:
- The income is treated like that of a partnership, meaning it's directly attributed to the member
- Or it is treated as a dividend, similar to a distribution from a corporation.
In such cases, Cyprus often looks to other common law countries for guidance, particularly when local case law is limited.
One influential precedent comes from the United Kingdom, where courts have ruled that US LLC income should be treated as corporate distributions (i.e., dividends).
Cyprus has adopted this interpretation. As a result, income received from a US LLC is treated as a dividend under Cypriot tax law.
Why this matters: For individuals who are tax residents in Cyprus with Non-Dom status, dividend income is completely tax-exempt.
That means LLC income can be received entirely tax-free, a significant benefit of this international setup.
Tax Risks When Classifying LLC Income in Cyprus
While the Single-Member US LLC + Cyprus residency setup may appear highly attractive from a tax perspective, it also comes with potential pitfalls, especially regarding where the company is effectively managed from.
Risk of Creating a Permanent Establishment in Cyprus
One of the key benefits of a Single-Member US LLC is that it generally has no tax obligations in the US, as long as:
- It doesn't generate US-source income, and
- It doesn't have a US permanent establishment.
However, in practice, many owners run the business from their country of residence, for example, Cyprus.
If core business decisions are made in Cyprus, this may be considered the place of effective management.
According to Article 9 of the Double Taxation Treaty between the US and Cyprus, this can create a management-based permanent establishment in Cyprus. In that case, the US LLC becomes taxable in Cyprus.
Because Cyprus treats the US LLC as a corporation, the same tax rules apply as for a Cyprus Limited:
- 12.5% corporate income tax on profits
- Potential additional contributions, depending on the nature and source of the income
Loopholes for Perpetual Travelers and Digital Nomads With Non-Dom
An expat with Non-Dom status in Cyprus is considered tax resident if they spend at least 60 days per year in Cyprus. Crucially, they must not establish tax residency in any other country, neither by having a permanent home nor by spending more than 182 days elsewhere.
If you’re an expat living as a Perpetual Traveler or digital nomad, running a business through a US LLC, no permanent establishment is created in Cyprus. As a result, there are no local tax obligations.
Since the Single-Member typically makes business decisions wherever they are currently located, a place of effective management could, in theory, arise in each country they pass through.
However, since the location of the Single-Member constantly changes, no permanent establishment is created in any one country. As a result, no tax liability arises in the countries visited.
A proven solution without counting on loopholes or risking a permanent establishment is to insert a Cyprus Limited as a holding company between you and the US LLC. We'll explain how this works in the next section.
The Solution? A Cyprus Limited as Holding Company
The challenge outlined above can lead to unintended tax consequences.
But with the right structure and a clear strategy, these risks can be effectively avoided.
The most robust solution is to combine the strengths of a US LLC and a Cyprus Limited Liability Company.
This is done by:
- Establishing a Cyprus Limited as a holding company, which becomes the sole member of the US LLC
- And having the individual founder become the sole shareholder of the Cyprus Limited.
This structure offers multiple benefits:
- Full tax exemption on the income generated by the US LLC
- Utilization of the favorable Non-Dom rules and corporate tax regime in Cyprus
- Establishing a fixed place of management and substance through the Cyprus Limited
In the next section, I'll explain in detail how and why this setup achieves full tax exemption on the LLC's income, as well as the conditions that must be met.
Attribution of US LLC Income to the Cyprus Limited
As explained earlier, Cyprus classifies income from a US LLC as a dividend from a corporation. This is highly advantageous in a holding structure:
According to Article 8(22) of the Cyprus Income Tax Law N118(I)/2002, dividends received by a Cyprus Limited company are not subject to corporate tax.
In short: This creates ideal conditions for a Cyprus Limited to act as a holding company for your US LLC, allowing profits to flow through tax-free.
Taxation of Dividend Distributions to the Shareholder of a Cyprus Limited Company
Suppose the shareholder of a Cyprus Limited company is a tax resident in Cyprus with Non-Dom status. In that case, they can receive dividends entirely tax-free for up to 17 years.
The only taxable element is the director's salary, and even that is exempt up to €19,500 per year, the personal income tax threshold in Cyprus.
Hint: Employment covered by social security, i.e., through your Cyprus Limited, is a prerequisite for Non-Dom status. You can check your qualification for Non-Dom with our Relocation Planner.
What about Non-Residents?
Shareholders who don't live in Cyprus can also receive dividends tax-free, because Cyprus does not impose withholding tax on dividend distributions.
This makes the structure especially attractive for:
- Perpetual travelers and digital nomads
- Shareholders who live in territorial tax countries, where only local income is taxed, and foreign-sourced income remains untaxed (e.g., Costa Rica, Georgia, Panama, Paraguay, Uruguay)
Bottom line: This structure allows for complete tax exemption on income from the US LLC. Both at the Cyprus holding company level and at the shareholder level.
The following illustration shows a typical setup for this kind of international tax-optimized structure, combining a Cyprus Limited and a US LLC from a Cyprus Non-Dom perspective.
Conclusion: Tax-Free, Compliant, and Secure
Using a US LLC in combination with Cyprus tax residency can be a beneficial strategy, primarily due to the tax-free dividend treatment under the Non-Dom regime.
However, tax traps such as permanent establishment risks or post-emigration taxation under German law (Außensteuergesetz) show that, without proper planning, a supposedly tax-free setup can quickly become a compliance headache.
The solution: A Cyprus Limited acting as the sole member of the US LLC.
This structure meets substance requirements, avoids, i.e., German tax complications, and creates a legally sound, long-term tax-free structure for international entrepreneurs.
- Thinking about relocating to Cyprus and want to avoid trouble with the tax office?
- Are you unsure whether your current setup aligns with your relocation plans?
- Or do you want to structure your international setup correctly and securely, while enjoying the full tax advantages of a US LLC and Cyprus residency?
I'll help you design your exit strategy, avoid tax risks, and build a structure that keeps you compliant and in control, no matter where life takes you.
