Working in Hungary with my LLC in the Us

I'd like to add my 2 cents to the discussion.

First, I assume you will qualify as a Hungarian tax resident under Hungarian domestic law and under the US/Hungary treaty on the basis that you are really living in Hungary for a lengthy period of time (a year or longer).

Re Hungarian personal income tax: if your LLC bills customers, but then retains all its earnings (e.g., in the LLC's own bank account), and does not actually pay the revenue out to you (but what will you live on?), then arguably you are not subject to Hungarian tax because you yourself have not obtained income.
But 2 caveats if the Hungarian tax office (APEH) figures out what is going on by, for example, auditing your LLC's Hungarian customers (if any) that it has billed and getting the full story out of those customers:
(1) APEH could say that your LLC is operating a business in Hungary through a "permanent establishment" (you!) and would attempt to tax the LLC's profits attributable to Hungary just as if it were a Hungarian company - Big Mess!
(2) APEH could invoke transfer pricing principles and say that you are "deemed" to receive compensation from the LLC based on the fair market value of the work you did for it.
Chances are APEH will not discover what is going on so the risk of these possibilities seems low. Also, if it makes you feel any better, I have never heard of APEH take such positions with respect to little fish.

In contrast, if the LLC actually pays out money to you, and APEH finds out, then they will say you're taxable on it. Then you get to argue with APEH about whether it is compensation (up to 40% rate) or dividends (20% tax). Messy problem!

US Taxes:
(A) Income tax: IRS treats the LLC earnings as your own (b/c LLC is disregarded) and it seems you're eligible for the foreign earned income (FEI) exclusion, so it looks like zero US income tax.
(B) Self-employment tax: interesting issue. IRS assumption is that doing business through an LLC is like a sole proprietorship, and thus SE tax applies. BUT! What if your LLC has a single foreign customer, and if you disregard the LLC, your relationship in substance with that customer looks like an employment under US tax/legal principles? Then can you say, for US purposes, that you are an employee of that foreign company? In this case, arguably no US social security or SE tax would apply. This situation, as far as I know, is totally untested, no cases, IRS rulings, etc IRS General Counsel was stumped when I asked them about this. If you were to take this position, you would simply report your LLC revenue as wages.

Good luck!

Les Edelman
www.edelmantax.com
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The answer completely depends on your citizenship and residency status in the US.

If you are a US Citizen or resident alien, then you'll have to pay taxes on all income world wide. You can get an exclusion for foreign earned income up to $80,000. In order to get the exclusion you pass the "Tax Home" and the "Physical Presence" tests. Tax home test means that your principal place of business is a foreign country which is sounds like you meet. The physical presence test means that you physically reside in the foreign country for 330 days of 12 months in a row. Your travel back to the states, whether for business or pleasure, will affect this test so you have to be very careful about the number of days spent travelling.

So assuming you meet the tests, you can exclude up to $80,000 of foreign earned income. Whether or not you can avoid paying taxes in Hungary depends on the rules there. If you do have to pay Hungarian taxes you can get a credit for the taxes paid there on income you can't exclude from US income. You can't exclude income and then get a credit for foreign taxes paid on the excluded income. Kinda convoluted but it does make a certain amount of sense. :) Also, you may not get a credit for 100% of the foreign taxes paid.

Unless you can figure out a way to avoid paying Hungarian taxes I doubt your plan will yield any tax savings. Also, your tax return will be extremely complicated. Check out IRS Publication 54, Tax Guide for US Citizens and Resident Aliens Abroad.

Also, in what state is your LLC organized? You could end up paying state tax on the LLCs income even though the income is from Hungary. For instance in California, LLCs have to pay California tax on world-wide income. Check your state's rules for more information.

Good Luck!!