A US-based LLC can have great tax advantages, especially for foreign entrepreneurs abroad. Even for US taxpayers(i.e US Citizens, US Residents, and Greencard holders), LLC taxes can be favorable.
An LLC is treated as a pass-through tax entity. What this means is that the LLC is not taxed directly. Instead, the profits and losses of the business pass through to its owners, who report them on their personal tax returns.
Tax-free LLC income for foreign owners of a US LLC
A US LLC opened by a non-US citizen or non-resident is common business structure.
The US revenues taxes the foreign nationals based on the terminology Is the income from USA is effectively connected with US trade or business, which means foreigners are only subject to US tax if they are “engaged in a trade or business in the United States”. If your business is not engaged in US trade or business, even if it generates income in the US, the income is not taxed in the US.
However, you are engaged in a trade or business in the US if any of the below listed tasks are undertaken by your LLC.
- You have at least one “dependent agent” in the USA, which are employees or companies that work for you almost exclusively, and
- this dependent agent does something substantial to further your business in the US, as opposed to something purely administrative, or
- you are engaged in “considerable, continuous, and regular” business in the US.
Some tax treaties include dependent agent exceptions. Therefore, if you reside in a country with an applicable tax treaty with the US, you may not be subject to US tax.
Depending on the treaty, you could claim you operate a “permanent establishment” (e.g., an office or other fixed place of business) in the country where you are a tax resident. In other words, when you live, work, and pay tax in your home country, the tax treaty may circumvent the US rights to tax you.In general, not taxable are:
In general, not taxable are:
- Personal services performed abroad.
- Selling digital products.
- Web design etc.
- Selling physical products if the shipping point is from outside of the US.
Any business transacted from within the US would be taxable. This potentially includes shipping from Amazon. Personal services performed from within the US are taxable as well.
Type of US Dependent Agent and tax implications
Example 1: Foreign Consultancy company without US office or representative
A Signature tax consultancy company is performing programming/design work for US clients. It is based in Singapore and has no US office or sales agents. All sales are done over the phone or online.
The company can open an LLC to receive payments in USD in a US bank account. The work is performed in Singapore and the owners are non-US citizens/residents, who are not taxed in US. Therefore, the LLC income is not taxed in the US as there are no offices or dependent agents in the US.
Example 2: Foreign “Fulfillment by Amazon/Alibaba/eBay” service provider
A foreign entrepreneur sells products into the US market using Amazon’s/Ebay/Alibaba “Fulfillment by Amazon/Alibaba/Ebay” service. All marketing and procurement are managed online by the non-US citizen, who lives in Singapore. Products are ordered and shipped to Amazon’s warehouses, where Amazon employees package the products and ship to customers in the US.
In this case, Amazon/Alibaba/eBay is not a dependent agent but an independent agent that has its own business with millions of other clients. Amazon/Alibaba/eBay is not uniquely working for this foreign entrepreneur.
Even though Amazon/Alibaba/eBay is not a dependent agent, the Amazon/Alibaba/eBay seller may still engage in a US trade or business. If the seller doesn’t manufacture the product, then the actual transaction, the transfer of ownership, takes place in the US. This means the seller may have to pay US income tax.
US LLC tax filing requirements for foreigners
US Personal tax filing requirement is based on various factors for example:
- Country of citizenship of the Individual.
- If the individual person resided in the USA for 183 days or more.
- The type of entity, LLC, S Corp, C Corp
- Is the LLC owned 100% by one foreign person or its owned by one foreign person with some US person or all members are foreigners.
- If any dividend was issued to LLC members and any Form 1099/1042S?
- If the individual is a foreign person does he have a valid ITIN (Individual Tax Identification Number)?
- Is any entity classification done for this LLC?
- Does the LLC have any US Effective connected trade or income (the word document attached explains this term with examples)
There is no US 1040NR personal tax return filing as there is no ECI (Effectively connected income reporting). However, In this scenario, there would be 1120 and 5472 filings (Please see below).
Foreign-owned U.S. DEs.
While a foreign-owned U.S. DE has no income tax return filing requirement, as a result of final regulations under section 6038A, it will now be required to file a pro forma Form 1120 with Form 5472 attached by the due date (including extensions) of the return. The only information required to be completed on Form 1120 is the name and address of the foreign-owned U.S. DE and items B and E on the first page. The foreign-owned U.S. DE has the same tax year used by its owner for U.S. tax filing requirements or, if none, the calendar year.” https://www.irs.gov/instructions/i5472
All foreigners who own a US LLC must File Form 5472 US tax return with the IRS for disclosure purposes even if they do not owe tax in the US.
In addition, foreign owners should be aware of the LLC tax implications in their local fiscal residence jurisdictions. The income from the US LLC may still be taxed in the country of citizenship or residence.
LLC taxes for US citizens or residents as owners
For Americans/residents owners there is no escape route and must file US tax return and pay US taxes irrespective of US business or Foreign business. For some countries with US tax treaty, they could avoid double taxation.
IRS does not treat LLC as a separate tax entity. Instead, as tax implication applies to the sole trader, all its income is passed through to the members of the LLC, who must declare it and pay personal income tax 1040 or 1040NR (for foreign nationals).
A single owner of an LLC would include the profit and loss from the LLC on Schedule C of his or her Form 1040. With two or more partners, each owner reports the allocated portion of the profits on their personal tax return.
However, some US states tax LLCs directly. Also, note that an LLC may elect to be taxed as a corporation. In many cases, American taxpayers will also be required to pay self-employment tax in addition to income tax.
Our team specialise with international expatriate U.S. personal tax return service. If you need assistance with US 1040 filing for refund claim/FATCA Compliance work/FBAR FINCEN114 Filing, ITIN/ Form W7 Application/EIN/Form W8BENE or CAA services/1040NR U.S. tax filing for refund claim of excess 1042S / 8288A/ 8805/ W2/ 1099. We are happy to assist our clients in a timely, efficient, and cost-effective way.
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