American LLC: What is an ETBUS?

A U.S.-based LLC can have great tax advantages, especially for foreign entrepreneurs abroad. LLC taxation can even be favorable for U.S. taxpayers.

An LLC is a pass-through tax entity, meaning that the LLC is not taxed directly. Instead, the profits and losses of the business are passed through to its owners, who report them on their personal tax returns.

LLC income not taxed in the US for foreign partners

A U.S. LLC opened by a non-U.S. citizen or non-resident may allow income that is not taxed in the U.S., but directly in the foreign partners' country of residence.

Obviously, certain rules apply to avoid taxes on LLCs.

This is because foreign nationals are only subject to U.S. tax if they are "engaged in a trade or business in the United States" (ETOB). If your business is not an ETOB, even if it generates income in the U.S., that income is not taxed in the U.S.

However, you are engaged in a trade or business activity (ETOB) in the United States if:

- (1) you have at least one "dependent agent" in the United States, meaning employees or companies that work almost exclusively for you, and

- (2) this dependent agent allows you to advance your business in the United States,

- (3) you have "substantial, continuous and regular" activity in the United States.

The courts have not established a clear and precise standard for what constitutes "substantial, continuous and regular" activity.

In addition, there are other circumstances that may make you an ETOB. The tax code and court decisions are vague about ETOB, which introduces an element of risk.

In addition, some tax treaties play a role by providing exceptions for dependent agents. Therefore, if you reside in a country that has an applicable tax treaty with the United States, you may not be subject to U.S. tax.

Under the treaty, you could claim that you operate a "permanent establishment" (for example, an office or other fixed place of business) in the country where you are a tax resident. In other words, when you work, live and pay taxes in your home country, the tax treaty can circumvent U.S. tax liability.

In general, the following are not taxable:

- Personal services rendered from abroad

- The sale of digital products

- Website design, etc.

- The sale of physical products if the shipping point is outside the United States.

Any business activity conducted from the United States is taxable. This potentially includes shipping from Amazon. Personal services performed from the United States are also taxable.

In order to limit the risks of requalification, it is essential to be accompanied by a tax lawyer or a chartered accountant. Our tax preparers can redirect you to a competent partner in this field.

What is a "dependent agent"?

Example 1: Foreign software company with no U.S. office or representative

A Mexican software company does design and programming work for U.S. clients. It is based in Mexico and does not have an office or sales agent in the United States. All sales are done by phone or online.

An LLC can be opened by a company to receive payments in USD into a US bank account. The work is performed in Mexico and the owners are non-U.S. citizens/residents, who are not taxed in the U.S. Therefore, the income of the LLC is not taxed in the U.S. because there are no offices or dependent agents in the U.S.

Second example: Foreign "Fulfillment by Amazon" service provider

A foreign entrepreneur sells products in the U.S. market using Amazon's "Fulfillment by Amazon" service. All marketing and procurement is handled online by the non-US citizen, living in Colombia. Products are ordered and shipped to Amazon's warehouses, where Amazon employees package the products and then ship them to customers in the United States.

In this case, Amazon is not a dependent agent but an independent agent with its own business with millions of other customers. Amazon is not the only one working for this foreign contractor.

The Amazon seller can still conduct a trade or business in the United States, even if Amazon is not a dependent agent. If the seller does not manufacture the product, the actual transaction, the transfer of ownership, takes place in the United States. This means that the seller may be required to pay U.S. income tax.

Here again, the tax code and the courts have remained vague as to the qualification of ETBUS. It is therefore advisable to secure this situation with a tax professional.

Foreign Tax Reporting Requirements for U.S. LLCs

All foreign partners of a U.S. LLC must file a U.S. 5472 tax return with the IRS for disclosure purposes, even if they do not owe U.S. taxes.

In addition, foreign owners should be aware of the tax implications of the LLC in their local tax residence jurisdiction. The income from the U.S. LLC may still be taxed in the country of residence.

Disclaimer: This document has been prepared on the basis of information available in the public domain and is for guidance only. Every precaution has been taken to ensure the accuracy of the information. However, no legal liability is accepted for any consequential incident that may result from errors or omissions contained in this document.

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