The tax treatment of non-US entrepreneurs selling into the US is probably the most misunderstood issue in all of US international tax.
This article discusses the US tax treatment of “non-resident aliens” or “NRAs.” You’re an NRA if you’re NOT any of the following:
- A US citizen,
- A US permanent resident (i.e., a “green card holder”), or
- Someone who’s lived in the US long enough to pass the “substantial presence test.”
- An accidental American
There are two very different US tax regimes potentially applicable to you—the “passive regime” and the “active regime.”
When you receive certain types of passive income (such as interest, dividends, rent, or royalties), you’re subject to a flat 30% tax. The general 30% rate may be reduced by an applicable tax treaty.
Typically, the payor of this sort of income is required to withhold tax at the applicable rate and pay that amount over to the US government. Then, you’re not required to file a US tax return—the withholding fully takes care of the tax, so there’s nothing further for you to do.
For example, if you hold stock issued by a US corporation, and the US corporation pays a dividend of $100, the US company will actually pay you only $70 (assuming a treaty doesn’t apply). The remaining $30 will go to the Internal Revenue Service.
Now, of course there are all sorts of exceptions here – https://www.irs.gov/individuals/international-taxpayers/fixed-determinable-annual-periodical-fdap-income
The US tax treatment of income from an active business is completely different.
Here’s how it works:
- You’re subject to US tax on business income only if you are “engaged in a trade or business in the United States,”
- Only if two things are true:
- (1) you have at least one “dependent agent” in the US, and
- (ii) that dependent agent does something substantial to further your business in the US (as opposed to something purely administrative or ministerial).
Finally, if you can benefit from an applicable tax treaty, then you’re only subject to tax if you operate in the US through a “permanent establishment” (e.g., an office or other fixed place of business).
Let’s say you decide to sell products into the US market using Amazon’s “Fulfillment by Amazon” service (i.e., Amazon FBA). So, you buy products and have them shipped to Amazon’s warehouses, and Amazon employees package the products and ship to customers.
Is Amazon your dependent agent? No, absolutely not. Amazon has their own business going on, and you’re just one of Amazon’s many clients.
So, in this example, you’re not “engaged in a trade or business in the US,” so you’re not subject to US tax on income from selling products into the US.
SETTING UP A US STRUCTURE
Why set up a structure anyway?
- To operate through a US bank account, which typically makes it easier to accept payments from US clients and connect to payment processing services.
- It also provides a liability shield for your business. Only the LLC, and not you directly, would be liable if someone were to sue.
Note that the above discussion is about income taxes only. Not sales taxes. State Sales and Use Taxes are based on a “nexus” concept. Some States will consider holding inventory in their State as creating a Nexus – therefore all Amazon FBA sellers, for example, will have tax nexus in multiple States. There are software tools for tracking and remitting State Sales taxes.