How to File US Taxes as a Non-US Resident for Non-US Entrepreneurs

Taxes as Non-US Resident

According to US tax law, you’re considered an “outsider” if you’re not a US citizen or permanent resident.

So as a non-US entrepreneur, you will have to figure out how to pay taxes as a non-US resident.

On this page, I’m going to take it step-by-step to make sure you understand how to deal with US taxes as a non-US resident.

If you’re a non-US resident and you’re looking to start your US business, email me at sam@mollaeilaw.com to get started.

 

Here’s the most important question to ask to find out what US taxes you owe as a non-US resident…

Question #1: Are You Generating Passive or Active Income in the US? 

There are 2 different types of tax regimes for entrepreneurs from outside of the US:

Passive Regime or Active Regime

 

Passive Regime

Passive Regime is when you receive certain types of passive income (such as interest, dividends, rents, or royalties). When you’re generating passive income, you’re subject to a flat 30% tax.

But if you’re based in a country that has a tax treaty this could be reduced. For example, the UK has a tax treaty with the US. This means UK businesses pay 0% tax in the United States (not including various taxes customers pay) and only pay tax in the UK.

Typically, the payor of passive 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 (IRS).

However, keep in mind that there are all sorts of exceptions for Passive Regime (just because US tax is complicated). For example, interest is a type of passive income on which tax must be withheld, but various exceptions allow you to earn certain types of interest completely tax-free. One type of tax-free interest is interest earned on ordinary bank deposits. The US apparently wants to encourage you to keep your money in the US.

Just remember that after you initiate the tax withholding treaty you no longer have to file taxes in the US. It’s that easy!

 

Active Regime

The US tax treatment of income from an active business is completely different than discussed above.

Here’s how it works:

  1. You’re subject to US tax on business income only ifyou are “engaged in a trade or business in the United States,” or “ETBUS” for short.
  2. You’re ETBUS only iftwo 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).
  3. Finally, if you can benefit from an applicable tax treaty, then you’re only subject to tax if (in addition to being ETBUS) you operate in the US through a “permanent establishment” (e.g., an office or other fixed place of business).

This is where things get complicated because those definitions are extremely general. Naturally, you also have exceptions. Tax treaties and the withholding rate for your country, which I mentioned in the previous section, may only apply if you have a fixed place of business elsewhere.

 

What’s a Dependent Agent?

The easiest way to look at a dependent agent is this is someone who actually works for you. They’re basically an extension of your business’s arm. A dependent agent could be an employee.

It could also be an independent contractor or a company offering a service to you exclusively (or almost exclusively).

 

What’s an Independent Agent?

An independent agent is the exact opposite of a dependent agent.

An independent agent is a person who’s running their own business and with respect to whom you’re simply a client. So, an independent agent has their own business going on, and that business helps your business in some way.

An independent agent does things for you but they’re mainly working on their own business, not yours. So, they’re independent of you – their actions are their own and aren’t an extension of your actions.

For this reason, simply using the services of an independent agent in the US doesn’t cause you to be treated as engaged in a trade or business in the US.

That’s how some companies are able to reduce their tax burden in the US. All they have to do is employ an independent agent instead of sending their own employees to the US.

 

So Where is the Confusion? 

Much of the confusion comes from how the US differentiates between US source income and foreign source income. For example, products imported into the US and sold there would be considered US source income.

Certain tax professionals may assume that you have to pay US tax just because you have US source income. But it’s NOT true.

US source income only means paying US tax if that income is generated by a business within the United States. They must be ETBUS before they’re forced to pay US tax.

Remember that if you’re not paying US tax, no US tax professional can charge you for filing your taxes in the US. It’s always worth keeping that in mind.

 

Example of How This Works 

Let’s say you sell products on Amazon’s Fulfillment by Amazon (FBA) service. So you buy products and you have it shipped to Amazon’s warehouses and Amazon employees are responsible for shipping, packaging, and ensuring that your’s listings remain on the website.

It’s easy to look at this and believe Amazon’s role would mean you must pay US tax. That’s wrong though.

Is Amazon your dependent agent? No.

Amazon runs its own business with thousands of other clients, and you’re just one of Amazon’s many clients.

Your company doesn’t have a business in the US. It merely sells into the US. And because there’s zero a withholding rate with the UK via a tax treaty all taxes for your company would be paid in your county.

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.

If it didn’t work this way any foreign company engaging a US business for anything would have to pay US tax because they would be contributing to their business efforts within the US.

So what would change this example?

If Amazon worked exclusively for your company that would change matters. Your company would then have a dependent agent that just works for them, therefore they would be considered to be doing business in the US. Then you would have to pay US taxes.

 

Let Me Make This Easy For You 

Here’s another way to think about it…

When you sell products, you’re definitely engaging in a trade or business – you’re sourcing products, doing marketing, shipping to customers, accepting returns from customers, and all the other activities that go into running a business.

But, you aren’t subject to US tax because you aren’t engaged in that trade or business in the United States. You’re engaged in that trade or business wherever outside the US you (and your dependent agents, if any) happen to be.

However, if you were to have dependent agents in the US, then you would be engaged in that trade or business in the US. You’d have people on the ground running your business from inside the United States. So, you’d be subject to US tax under the active regime.

But…

if you only use the services of an independent agent (such as Amazon), then the people in the US helping you aren’t your people. They’re just people running their own business (in the case of Amazon) or people working for someone else (in the case of Amazon’s employees and independent contractors).

Tax isn’t always black and white. The language used in tax codes all over the world isn’t necessarily specific. That’s why tax professionals exist so they can remove the ambiguity in the language. It’s no surprise that international businesses always have questions…

Here are some of the important questions non-US businesses typically have regarding US taxes:

 

What if I operate my company through a US Limited Liability Company (LLC)?

If the CEO of Company A owns a US LLC it doesn’t change a thing. That’s because if you’re the sole member (i.e., owner) of a US LLC, then the LLC is “disregarded” as a separate entity from you for US tax purposes. That just means that the LLC doesn’t exist for US ax purposes.

So, operating through an LLC does not change the US tax analysis.

 

What if my company has a US bank account and is paid in US dollars? 

It doesn’t matter. You can operate using any bank account and any currency you please.

It only matters if your business is classified as ETBUS. There’s nothing to stop an international business from opening a US bank account and using it for their business.

All that matters is whether they’re classified as ETBUS.

 

What if my company sells products online and the server is based in the US?

The company selling the web hosting service doesn’t work exclusively for you. They work for thousands of other clients, which includes Company A.

That means the web hosting service is an independent agent.

This doesn’t make you ETBUS.

 

What If I sell physical products into the US, won’t I have US source income?

Yes, you will have US source income. But that doesn’t matter one bit.

To be subject to US tax under the active regime, you have to be ETBUS.

Only then are you subject to your US source income that’s “effectively connected” with your US business. But, just having US source income all by itself doesn’t make you subject to US tax.

 

Is it a good idea for my company to establish a US corporation and have it take some of the profits?

Company A’s CEO likely got this idea from a tax professional. The CEO was likely told that by assigning some of the profits to this corporation it would shield him from needing to pay US tax. It would stop his company from being classified as selling directly into the US.

But this is an unnecessary structure. It’s a lot of time and money spent to both establish and maintain. If you’re not classified as ETBUS you’re not gaining any benefits from doing this.

Essentially, you’re paying to solve a problem that never existed in the first place.

 

Setting up a US Business 

There are many reasons why you may need a US entity. Company A may want to start selling directly to customers and it needs an entity so it can open a bank account and accept US currency.

The best way to do this is through setting up a single-member LLC in any one of the 50 states.

By setting up this single-member LLC, Company A could open a bank account and also protect itself from liability if someone decides to sue them. A US client could only sue the LLC, which is not directly connected to Company A’s main business.

Understand that this is where things can get complicated. If you don’t understand how to do it, opening both a single-member LLC and a bank account can be difficult.

I‘ve set up a ton of businesses for my clients.

By using my business formation services, you can concentrate on running and expanding your business while I deal with the complicated details of setting up your business and getting your EIN.

 

Conclusion

US tax has a lot of misconceptions associated with it which I’ve clarified on thie page.

Here are the final takeaways about dealing with taxes as non-US resident:

  • Just because you have US source income doesn’t mean you need to pay US tax
  • Using independent agents in the US doesn’t make you eligible to pay US tax
  • You don’t need to establish a US-based corporation to shield yourself from taxes
  • Many tax professionals make the same mistake of assuming selling into the US means you must pay US taxes

With these main points in mind, you can now ensure that your business pays the minimal amount of tax required.

If you’re looking to establishing a US business, email me at sam@mollaeilaw.com to take the first step.