Despite US customers: Operating an LLC tax-free

Are you a non-US citizen and would like to use your LLC to do business with US clients without becoming liable for tax in the USA?
This guide explains how this is possible - with specific examples and references to official US laws.

Basics: Passive vs. active income

First, it is important to understand the difference between passive and active income for non-U.S. residents.

Passive income

Passive income such as interest, dividends and license fees are subject to the USA of a withholding tax of 30% (Internal Revenue Code (IRC) Section 871(a)).

Example: For $1,000 license fees from a US company, $300 is withheld for taxes.

Active income

Active income from a US business is treated differently. As a non-US citizen without Physical presence in the USA you are generally not subject to tax as long as you have no "nexus" (tax nexus) in the USA.

Tax-free business activities with US customers

1. Product sales to US customers without a US presence: According to IRC Section 864(b), the mere sale of goods to the US does not trigger US tax liability as long as there is no nexus.
   Example: Your dropshipping business sells via a Non-Domestic LLC (Exempt-LLC) products to US customers. Without a physical US presence, this income remains in the US. USA tax-free.
2. Digital products and services: The sale of digital products or services from the abroad to US customers is in the USA tax-free if the service is provided outside the USA.
   Example: As a web designer in Germany you offer your services to US customers. This income is not subject to US taxation.
3. Use of independent US service providers: The use of independent agents in the USA does not trigger any tax liability (IRC Section 864(c)(5)).
   Example: A US fulfillment service ships your products. As long as this service works independently and not exclusively for you, there is no nexus.

Further examples of tax-free income from US sources:

Software and apps

• An Indian software company develops and sells a mobile app to US customers via its US LLC. The entire development and support takes place in India.
• The sales proceeds are generally tax-free in the USA as long as no significant business activities are carried out in the USA.

Graphic design and digital art

• A Canadian graphic designer creates digital logos and illustrations for US clients through his US LLC. All work is carried out in Canada.
• This income is typically tax-free in the USA.

Additional article with examples: Tax-free income from US sources - US clients

Be careful with these activities

1. Physical presence in the USA: An office or regular business trips to the USA can establish nexus and trigger tax obligations.
2. Dependent Contractors: If you employ someone in the USA who works mainly for you and acts as an employee, this could trigger a tax liability.

Conclusion

As a non-US citizen, you can do business with US clients through your LLC without becoming taxable in the US. The key is not to establish a physical presence or nexus in the US. Note, however, that you may still need to file certain forms, such as Form 5472 for Disregarded Entities.

Remember: Although this information is based on official U.S. laws, every business situation is unique. Consult a tax advisor to ensure that your specific situation is in compliance with current U.S. tax laws.

FAQ: Tax-exempt income from US sources for non-domestic LLCs

1 What is a non-domestic LLC?

A non-domestic LLC is a limited liability company that is registered in the USA but is managed by a non-US citizen without a physical presence in the USA.

2. can a non-domestic LLC earn tax-free income from US sources?

Yes, under certain circumstances, a non-domestic LLC can earn income from US sources without becoming taxable in the US.

3. what types of income can be tax-free?

Typically, active business income can be tax-free if there is no "Engaged in a Trade or Business in the United States" (ETBUS) exists. This may include income from the sale of goods or the provision of services.

4 What does "Engaged in a Trade or Business in the United States" (ETBUS) mean?

ETBUS exists if you have a substantial, continuous and regular business activity in the US. The exact definition can be complex and depends on the specific circumstances.

5. can I sell products to US customers without becoming liable for tax?

Yes, the mere sale of products to US customers without a physical presence in the USA does not generally trigger a tax liability.

6. what about the sale of digital products or services?

Selling digital products or providing services from outside the U.S. to U.S. customers is generally tax-free as long as you are not classified as ETBUS.

7. can I use a fulfillment service in the USA without becoming liable for tax?

Yes, the use of an independent fulfillment service in the USA generally does not trigger a tax liability as long as it does not work exclusively for you.

8 What about passive income such as interest or dividends?

Passive income from US sources is generally subject to a withholding tax of 30%, which is often withheld directly by the paying party.

9. are there exceptions to the taxation of passive income?

Yes, double taxation agreements can often reduce or eliminate withholding tax on passive income.

10. do I have to file a US tax return if my income is tax-free?

Even if your income is tax-free, you may need to file certain forms, such as Form 5472 for Disregarded Entities.

11 What is a "nexus" and why is it important?

A nexus is a Tax nexus in the USA. If your LLC has nexus, this could result in an ETBUS classification and trigger a tax liability. Nexus can arise through physical presence, employees or permanent business premises in the US.

12. can I employ staff in the USA without becoming liable for tax?

Employing staff in the USA usually leads to nexus and thus to ETBUS classification and tax liability. It is advisable to work with independent contractors instead.

13 What happens if I travel to the USA on business?

Occasional business trips do not normally trigger a tax liability. However, frequent or long stays could be interpreted as justification for an ETBUS.

14. how can I ensure that my LLC income remains tax-free?

To keep your income tax-free, avoid nexus in the U.S., use independent service providers and conduct your business primarily from outside the U.S. to avoid being classified as ETBUS.