A widespread fiscal myth has gained momentum in recent years: that constituting a US Limited Liability Company (LLC)—often in states like Wyoming or Delaware—is a legitimate strategy for Spanish tax residents to reduce or even eliminate their Spanish tax burden. Many claiming its "fiscal transparency" allows residents to defer or evade tax payments entirely.

As tax and residency lawyers specializing in Spanish and international law, we must emphatically debunk this misconception. Using a foreign LLC to shelter income from Spanish taxation is, in the vast majority of cases, a severe misstep that exposes the resident to rigorous inspections, crippling financial penalties, and potential prosecution for tax fraud (delito fiscal).

This article aims to clarify the legal reality and warn clients about the risks of adopting schemes that fundamentally ignore the core principle of worldwide taxation in Spain.

1. The Irrefutable Rule: Spanish Worldwide Taxation

The fundamental mistake inherent in using an LLC to "hide" income starts with a misunderstanding of Spanish tax residency. 

Spanish tax regulations (Ley del Impuesto sobre la Renta de las Personas Físicas or IRPF) stipulate that any natural person considered a Spanish tax resident must pay tax on their worldwide income. Tax residency is established if an individual spends more than 183 days in Spanish territory during the calendar year. 

This principle is non-negotiable: if you are a resident in Spain, profits generated by your LLC in the US must be declared to the Spanish Tax Agency (Agencia Estatal de Administración Tributaria or AEAT), regardless of where that income was generated. 

2. The Core Conflict: Spanish Classification of the US LLC

The key selling point for these schemes is the US Internal Revenue Service's (IRS) flexibility, which allows a single-member LLC to be treated as a disregarded entity. In the US, this means the entity itself typically pays no federal corporate tax, and the income "passes through" to the owner’s personal US tax return. 

However, the LLC’s classification by the IRS is not binding on the Spanish tax authority. 

The Income Attribution Regime (Atribución de Rentas)

For Spanish tax purposes, an LLC that lacks genuine economic substance or a fixed establishment in the US (e.g., offices, employees, effective management) and is controlled by a Spanish resident is generally treated as a transparent entity under the Spanish Income Attribution Regime (Régimen de Atribución de Rentas). 

This treatment is supported by the Friendly Agreement of 2006 between the competent authorities of Spain and the US regarding the Double Taxation Treaty (DTT). This agreement allows these fiscally transparent entities to benefit from the DTT while simultaneously subjecting them to Spanish  Atribución de Rentas rules. 

The Critical Myth Debunked: Tax on Undistributed Profits

The most dangerous misconception promoted is the belief that Spanish residents only pay tax when the LLC’s money is transferred (or "distributed") to their personal Spanish bank account. This is fundamentally incorrect.

If the LLC is classified under the Income Attribution Regime, the Spanish resident shareholder is legally obligated to declare 100% of the LLC’s annual profits in their Spanish Personal Income Tax (IRPF—Modelo 100/D100), based on their ownership share. This is required even if those profits remain inside the LLC’s US bank account and are not distributed. 

These attributed earnings are integrated into the resident’s general IRPF tax base, where marginal tax rates for high earners can exceed 50%. 

The Alternative: Controlled Foreign Corporation (CFC) Rules

Alternatively, if the LLC has legal personality under Spanish law and meets certain conditions—such as generating passive income (like interest or dividends) and having effective taxation in the US that is less than 75% of what it would have been in Spain—the Spanish tax authority may apply the Controlled Foreign Corporation (CFC) Rules (Transparencia Fiscal Internacional or TFI). The TFI regime also requires the Spanish resident to impute the LLC’s passive income into their IRPF base. 

3. The AEAT’s Scrutiny: High Risk of Penalties

The Spanish Tax Agency is highly aware of these offshore structures and actively scrutinizes cases where a Spanish resident controls a foreign entity from Spain. If the AEAT determines that the LLC’s effective management is located in Spain (i.e., the owner works from their Spanish residence) and the structure lacks genuine economic rationale in the US, the resident faces serious consequences.

Risk of Reclassification as an Interposed Entity

Hacienda can reclassify the LLC as an Interposed Entity (Sociedad Interpuesta), established for the sole purpose of fraudulently simulating or channeling income to avoid personal taxation. It is extremely difficult to justify to the tax authorities that revenue from personal services performed by a Spanish resident should be invoiced through a low-tax foreign entity and not be imputed directly to the individual’s IRPF. 

Penalties and Criminal Exposure

Detection of a fraudulent tax avoidance scheme using an LLC carries severe risks : 

• Fines and Surcharges: Significant penalties levied on the undeclared tax quota, plus interest (intereses de demora). 
• Tax Fraud Charges: If the amount of tax evaded exceeds specified legal thresholds, the resident faces criminal prosecution for Tax Fraud (Delito Fiscal). 

4. Mandatory Reporting Obligations (Spain and US)

Beyond the IRPF liability, operating an LLC requires strict compliance with administrative reporting obligations in both countries. Failure to adhere to these rules incurs substantial penalties:

1. Spain (Modelo 720): Spanish tax residents must file Modelo 720 (Declaration of Assets Abroad) to report bank accounts, securities, and real estate held outside of Spain if the value exceeds reporting thresholds. This includes accounts held in the name of the US LLC. 
2. US (IRS Informational Returns): Even if the LLC has no tax liability in the US, it has mandatory informational filing duties with the IRS. Failure to file these informational returns can result in substantial statutory penalties.

Conclusion: The Necessity of Expert Tax Counsel

Establishing an LLC in the US is not illegal in itself and can be a valuable corporate tool for businesses with a genuine US presence or for individuals who are not Spanish tax residents.

However, for a Spanish tax resident operating a digital or service business from within Spain, the LLC is emphatically not a tax-saving vehicle. It is a highly complex structure that, if improperly managed, will result in full income attribution under IRPF (taxing 100% of profits, distributed or not) and creates a critical administrative risk.

If you currently operate an LLC or are considering forming one, specialized international tax advice is essential. The only way to ensure administrative peace of mind and avoid crippling sanctions is to guarantee that your structure strictly adheres to Spanish fiscal classification rules and complies with all reporting obligations mandated by both the AEAT and the IRS.