Tax-free income from US sources - US clients

Digital products and services for US customers

Tax-free transactions with US clients: Basic principles

Non-U.S. citizens or foreign corporations can generate tax-free income from U.S. sources under certain circumstances. The key is to sell digital products or provide services without being classified as "Engaged in a Trade or Business in the United States" (ETBUS).

Examples of tax-free income from US sources

1. e-books and digital publications

• Tax-free transactions with US clientsA German author sells e-books to American readers via his US LLC.
• Why tax-free? The entire value chain takes place outside the USA.

2. online courses and webinars

• Tax-free income from US sourcesA French language teacher offers online French courses to US students.
• Tax-free, because: All courses are held from France, without a physical presence in the country. USA.

3. software and apps

• Tax-free transactions with US clientsAn Indian software company sells a mobile app to US users.
• Reason for tax exemptionDevelopment and support are carried out entirely in India.

4. graphic design and digital art

• Tax-free income from US sourcesA Canadian designer creates logos for US companies.
• Relevant for tax purposesAll work is carried out in Canada.

5. consulting services

• Tax-free transactions with US clientsAn Australian consultant offers strategy consulting for US companies.
• Tax-free, asConsultation takes place exclusively via video conference from Australia.

Important information for tax-free income from US sources

1. No physical presence in the USADecisive for tax-free transactions with US customers.
2. Avoidance of ETBUS statusActivities should not be interpreted as US business activities.
3. Use of independent contractorsUse US-based service providers as freelancers if required.
4. Payment processingUS payment service providers do not normally trigger a tax liability (Stripe, Paypal, etc.).
5. Careful documentation: Provide evidence that all significant activities outside the the USA take place.

Additional article: Despite US customers: Operating an LLC tax-free

Guide: Signs of tax-free income from US sources

Use this checklist to assess whether your transactions with US clients may be tax-free.

1. place of performance

• Tax freeYou perform all material activities outside the USA.
• TaxableYou regularly travel to the USA to provide services there.

2. physical presence

• Tax freeThey have no offices, warehouses or permanent facilities in the USA.
• TaxableThey rent office space or use co-working spaces in the USA.

3. personnel in the USA

• Tax freeYou do not employ any employees or dependent contractors in the USA.
• TaxableYou have employees or exclusive representatives in the USA.

4. type of products/services

• Tends to be tax-freeYou offer purely digital products or online services that you provide remotely.
• Potentially taxableYou trade in physical products that you store or manufacture in the USA.

5. customer interaction

• Tax freeYou communicate exclusively digitally (e-mail, video calls) with US customers.
• TaxableYou regularly meet with customers in the USA in person.

6. payment processing

• Tax freeYou use international payment service providers or offshore accounts.
• To be checkedYou only use US bank accounts for business transactions.

7. scope of business in the USA

• Tends to be tax-freeYou do occasional or sporadic business with US clients.
• Potentially taxable: You operate a continuous, extensive business activity aimed at the US market.

8. contract design

• Tax freeYou conclude contracts outside the USA and these are not subject to US law.
• To be checkedYour contracts are subject to US law or you sign them in the USA.

9. marketing and sales

• Tends to be tax-freeYou operate exclusively online marketing and sales.
• Potentially taxableYou take part in US trade fairs or place physical advertising in the USA.

10. technical infrastructure

• Tax freeYour servers and technical infrastructure are located outside the USA.
• To be checkedYou use US-based servers or cloud services for critical business processes.

Important noteThe more of these criteria for tax-free income you meet, the more likely it is that your US transactions will actually be tax-free. Please note, however, that each case must be considered individually. Even if there are many indications of tax exemption, the legal and tax situation can be complex. Tax-free US income does not automatically mean that there are no tax obligations in your home country. If in doubt, seek professional advice.