Do foreign-owned US LLCs pay US tax

Two questions decide it

US income tax on a foreign-owned LLC comes down to two questions, asked in order.

1. How does the IRS classify the LLC?

   This decides who the taxpayer is: the owner, the partners, or the LLC itself.

2. What kind of US income is there?

   A non-resident is taxed by the US only on certain types of US income. Income from a US trade or business is taxed one way, passive US income another, and most foreign-source income not at all.

How the IRS classifies an LLC

For the default types, the LLC is a pass-through. The key question is then whether the owners, as non-residents, have taxable US income.

Income from a US trade or business

A non-resident who is engaged in a trade or business in the United States is taxed on income effectively connected with that business, known as ECI. It is taxed at the same graduated rates as a US person's income, after deducting related business expenses, and reported on Form 1040-NR for an individual owner.

Whether you are engaged in a US trade or business depends on facts, not on where the company is registered. Things that point towards it include:

• employees, contractors acting as dependent agents, or an office in the US,
• the owner performing the work while physically in the US,
• regular, continuous business activity carried on in the US.

Registering an LLC in a state, and having a registered agent there, does not by itself mean the business is carried on in the US.

Work done outside the US

For services, where the work is physically performed generally decides where the income comes from. A consultant or developer who lives abroad and does all the work there, invoicing clients through a US LLC, generally earns foreign-source income. If the owner has no US office, staff or agents, that income is usually not taxable in the US, even though the money arrives in a US bank account.

Selling goods is less straightforward. Inventory in US warehouses, US staff or a US office can change the answer, and so can how the sales are made. If you hold stock in the US, get the facts reviewed rather than assuming no tax applies.

Passive US income: the 30% withholding

US-source income that is not connected with a US business, such as dividends from US companies, some interest, rents and royalties, is generally taxed at a flat 30% of the gross amount, usually withheld by the payer. A tax treaty between the US and the owner's country can reduce that rate. Individual owners report this income on Schedule NEC of Form 1040-NR where a return is required.

Tax treaties

If your country has an income tax treaty with the US, it may reduce withholding on passive income. It may also mean business profit is taxed by the US only if you have a permanent establishment in the US, such as a fixed place of business. Treaties differ country by country, and some countries have no US treaty. Claiming a treaty benefit can require a disclosure or a US taxpayer number.

State tax

States have their own income and franchise taxes and their own rules on who owes them. They generally look at activity in the state, such as property, staff, stock or sales, not simply where the LLC is registered. Some states also charge a minimum tax or fee to every LLC registered there, whether or not it has income. California's $800 minimum annual tax is the best-known example.

Filing even when no tax is due

Owing no US income tax does not mean filing nothing. A single-member LLC owned by a foreign person generally files Form 5472 with a pro forma Form 1120 each year it has reportable transactions with its owner, such as money paid in or taken out. The penalty for missing it is $25,000. The full list of yearly filings is in every filing a foreign-owned LLC has each year.

Three examples

A designer working from home abroad

She owns a single-member Wyoming LLC, works only from her home country, and has no US staff or office. Her income is generally foreign-source and not connected with a US business, so no US income tax is due and no Form 1040-NR is needed. The LLC still files Form 5472 and pays Wyoming's annual license tax.

A seller with a US warehouse and a US employee

He sells through his own website from a rented US warehouse staffed by an employee. That points strongly to a US trade or business. The profit connected with it is likely taxable in the US, reported on Form 1040-NR, and state taxes may apply where the warehouse is.

Two partners with US operations

Two non-resident partners run a US office through their LLC. The LLC files Form 1065, gives each partner a K-1, and generally withholds tax on their shares of effectively connected income. Each partner then files Form 1040-NR.

Your home country

The US answer is only half of it. Your country of residence may tax the same profit, and may treat the LLC as transparent or as a separate company. Where both countries tax the same income, a treaty or foreign tax credit may prevent double taxation.

This guide is general information. It is not tax or legal advice for your situation.