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Sunday, 21 July 2024

What Americans Need to Know Before Registering a Liberland Company

I learned some things the hard way. Watch out for the following pitfalls when forming a company in Liberland as a U.S. Person.

2023-05-22 Update: The IRS has approved my Form 8832, Entity Classification Election filing.

Today, I breathed a sigh of relief as I put a 5mm tall stack of paperwork into a USPS Priority Mail Flat Rate® Envelope and sealed it.

Over the past few months, I have been studying IRS Forms and Instructions and preparing my 2022 tax filing packet. Today, all that paperwork is in the mail, soon to be received by the American tax officials. 

I politely held my ground in front of the IRS agent, and clarified that the only truthful answer I could give to her was “Republic of Liberland”…

Jonathan A. McCormick, Jr.

Some of the paperwork was typical of American tax filers, like Form 1040 and its applicable schedules. The typical forms are relatively simple, since there are tax softwares that are designed to handle the most common tax forms and handle all the internal math within those forms.

But some of the paperwork in my packet was on the unusual side, like Form 8858 and its applicable schedules. This is because I have a tax situation that is rare for Americans in general, but which may become common for American-Liberlandians in the future: being a “U.S. Person” who owns a company registered in the Republic of Liberland. 

As a dual-citizen of the U.S. and Liberland, the U.S. Government expects me to report to the IRS on my worldwide income, including through any foreign entities. 

being different has its own challenges, since sometimes the world’s systems are not yet prepared to accommodate you. But given enough time, that will hopefully change as Liberland advances in its diplomatic efforts.

Jonathan A. McCormick, Jr.

When I registered my Liberland limited company in February of 2022, I was aware of this expectation, but I was unaware of the details and logistics of how to achieve compliance on-time and in harmony with my conceptions about the true nature of the company. I simply expected to take care of all that paperwork stuff in early 2023 when I would normally prepare my personal tax return. That assumption was a mistake. Let me explain how. 

My entity is a Liberland limited company. It is basically the equivalent of an LLC due to its “pass-through” nature (It’s not taxed at the company level.) and due to its protection of the owner from liability in excess of their ownership value. For my tax filing, I decided that I wanted to treat my company as what it essentially is: a single-member pass-through entity, or, an entity that is (for tax purposes) disregarded as being separate from its owner. So, for my U.S. tax filing, I wanted to file Form 8858, the “Information Return of U.S. Persons With Respect to Foreign Disregarded Entities (FDEs) and Foreign Branches (FBs)”

There are other forms available, like Form 5471, the “Information Return of U.S. Persons With Respect To Certain Foreign Corporations”, and Form 8865, the “Return of U.S. Persons With Respect to Certain Foreign Partnerships”. But since I want my company to be treated as a Foreign Disregarded Entity (FDE), I picked up Form 8858 and its official instructions after tax year 2022 was over. 

Desk of a tax filer
The U.S. Government places reporting requirements on its citizens, including for reporting offshore entities. Image courtesy of Pixabay.

On page 4 of the Instructions for Form 8858, I discovered that in order to file Form 8858, I would need to first file Form 8832 “Entity Classification Election” to elect (choose) to have my company classified as an FDE for U.S. tax purposes. And in order to file that form, I had to first file another form, SS-4, “Application for Employer Identification Number”

❌ Form SS-4

❌ Form 8832

❌ Form 8858

So I went to the IRS website to apply electronically for an EIN. When I entered the web assistant interface, I was informed that “If you were incorporated outside of the United States or the U.S. territories, you cannot apply for an EIN online. Please call us…”

So, I called the number and an IRS agent and I went over the fields of Form SS-4. But when the agent heard my answer to Line 9b, “If a corporation [company], name the state or foreign country (if applicable) where incorporated [registered]”, she was confused. My answer was “Republic of Liberland”, which is the truth. She referenced the IRS’s official list of countries and, of course, did not find Liberland on it, since Liberland is not yet recognized by the U.S. Government.

She then asked me for another country name to put down for Line 9b. I politely held my ground, clarifying the current recognition status of Liberland and specifying that my company was registered with the Government of the Republic of Liberland, and not with any other government. Therefore, it would be inappropriate for me to name any country other than that which my company is truthfully organized under. I am ethically and legally required to be truthful on my tax documents. The Republic of Liberland is the ONLY truthful answer that I can enter for Line 9b.

After a bit of a standoff on the phone, I was mentally preparing to call my congressman, but the IRS agent eventually decided to move on with the rest of the Form SS-4 and then she assigned my company an EIN.

✅ Form SS-4: DONE

❌ Form 8832

❌ Form 8858

Once my company had an EIN, I right away got to work on Form 8832. I filled-out the Entity Classification Election form and indicated my desire for late classification relief (which I had to ask for because I missed the very narrow 75-days window after registering my company). On Form 8832, Part II, Line 11, I provided an explanation for why my entity classification election was not filed on time. I then signed the form and sent it to the IRS via USPS Certified Mail®. In addition to sending Form 8832 to my state’s assigned IRS office for the actual entity classification election action, I also was obligated to “attach a copy of Form 8832 to the entity’s federal tax or information return for the tax year of the election.” So I printed an extra copy of Form 8832 and added it to my growing pile of paperwork to send with my Form 1040.

✅ Form SS-4: DONE

✅ Form 8832: DONE

❌ Form 8858

Finally, there is only one left: Form 8858 and its applicable schedules. Since I had already prepared my company’s Form 1040 Schedule C, it seemed fairly straightforward to copy and paste the appropriate data into Form 8858 Schedule C. After a few other schedules, plus creating an “Organizational Chart” to satisfy Form 8858 Line 5, another task was finished.

✅ Form SS-4: DONE

✅ Form 8832: DONE

✅ Form 8858: DONE

Once I had finalized the contents of my 2022 U.S. federal tax filing packet, I made a copy for my own records and sent the original via USPS Priority Mail. Why Priority Mail or Certified Mail? Because they offer tracking, and I get a verifiable record of the mailing process. 

So what happens now? I live my life and wait to see what the IRS’s response will be. Nothing is guaranteed, especially when you are operating outside the realm of what is “normal”. Being part of a new country is a special opportunity. But being different has its own challenges, since sometimes the world’s systems are not yet prepared to accommodate you. But given enough time, that will hopefully change as Liberland advances in its diplomatic efforts.

Key takeaways:

If you are a U.S. Person who plans to register a company in Liberland:

  1. Do your research and get professional advice if needed. Plan ahead and prepare.
  2. Apply for a U.S. Employer Identification Number (EIN) for your Liberland company. 
  3. Within 75 days after registering your Liberland company with the Liberland Government, file IRS Form 8832, “Entity Classification Election” in order to specify to the U.S. Government how you want your company to be treated for IRS reporting purposes. If you miss this very narrow time window, then you can seek late election relief if you are eligible, but there are no guarantees about whether it will be approved. If you don’t file this form, then your Liberland company may be automatically treated as a corporation by the IRS under the Form 8832 foreign default rule.
  4. When you file your annual tax packet with the IRS, include the appropriate forms and schedules based on the nature of your Liberland company. 
Regulations for “offshore” companies are often done with intent to prevent loss of tax revenue for the home country due to tax evasion by ultra rich individuals. But as an entity type with filing fees between $10 and $100 USD, the Liberland limited company is accessible to a far broader demographic than just the “ultra-rich”. This means that e-residents and citizens (if living under the jurisdiction of other countries) need to first research how organizing an LL company will impact their tax reporting obligations imposed by the other governments in their lives. Image by Markus Winkler from Pixabay.

Do you have experience with filing U.S. tax forms for Liberland companies? Do you have any questions or comments on this article? Feel free to share your thoughts with the author: LiberlandHacker(at)pm(dot)me.

DISCLAIMERS: This article is designed to provide information that can potentially be helpful to “U.S. Persons” who plan to have or already have Liberland companies. However, nothing in this article is to be construed as professional tax or legal advice. Readers are encouraged to do their own research and get professional advice where needed. This information is provided “as is” with no warranty of any sort. The tax and reporting requirements can and do change, and Liberland’s current recognition status may impact the experience of U.S. filers. Of course, this article presents the perspective of the author, and does not necessarily reflect the views of the publisher.

Jonathan A. McCormick, Jr.
Techie. Entrepreneur. Free thinker. Senior International Correspondent for Liberland Press.

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