How to make Zero Federal Tax on USA LLC profit by Non-resident

Every LLC in the USA is liable to pay Federal Tax on their business profit. LLC owners can choose either the option to pay flat 21% corporate tax or opt LLC as a disregarded entity and the LLC owner will report LLC’s business income in his/her personal income tax return and end up paying federal tax which ranges from 10% – 37%. However, if you’re foreign resident (Non US Resident) then you can avoid the Federal Tax if you meet the eligibility of non-ETBUS.

So we need to understand first the concept of ETBUS

Understanding the concept of ETBUS

ETBUS is a concept that all non-resident LLC owners in the United States must understand if they want to avoid federal tax.

ETBUS stands for “Effectively Connected to a US Trade or Business”

A LLC carries ETBUS status when it carries regular, significant and consistent business activities in the US.

As per ETBUS rule, US source income shall be subject to federal tax if non-resident fulfil the criteria of ETBUS.

Hence if you do not meet the criteria of ETBUS then you do not need to pay federal tax in the USA.

What qualifies an US LLC to be Non-ETBUS?

There are no straightforward rules or regulations defined by the IRS to what constitutes ETBUS. However, as per case laws, rulings, IRS memos, and IRC 1.864-4 these are the crucial factors that the IRS takes into consideration while determining whether an LLC is ETBUS or Not includes:

Nature of the business activities,
Presence of owner, employees or agents in the United States,
Frequency as well as continuity of operations.

A business is Non-ETBUS only if below conditions are fulfilled:

LLC must be owned by 100% non-resident
Foreign person not physically be present in United State to operate business in USA
LLC does not have any “dependent agent” in the United States. Dependent agents means permanent employees or companies that work only for you and
Dependent agents do not perform any key business operations to grow your business in the United States. Purely administrative jobs are not included under this rule.

“Mere selling products or services remotely to US customers shall qualify as a business entity under the Non-ETBUS status especially if it lacks physical presence or ongoing businesses within the US.

Who are non-resident of the USA?

Non-resident alien can be either natural or legal persons if you are not the below:

A US citizen
A US permanent resident (i.e., “green card holder”), or
You have lived in the US enough time to pass the “substantial presence test.”

Nature of Business Activities qualified for Non-ETBUS

Intangible Services

Owners of non-resident LLC who are providing intangibles like consulting or digital services can save themselves a huge amount of money by ensuring non-ETBUS status. Income generated through these services which are given remotely from outside the US does not attract any federal tax whatsoever.

Drop Shipping Business

In addition, drop shipping business can be classified under non-ETBUS where there is no need for paying taxes to the government. If for instance an LLC buys goods from suppliers then sells them directly to their US customers with no inventory involved and no physical operation within the United States, then such revenues are exempted from federal tax.

Tips on Maintaining Non-ETBUS Status

To maintain non-ETBUS status, non-residents owning LLCs should do the following:

Never have a physical office/warehouse located in USA
Not employ any staff/agent conducting normal day-to-day businesses within the USA.
Ensure that management and control of company affairs happens outside the USA.
Logistics handling and shipping should be done by third party fulfilment service providers

There are other taxes in the USA that are liable to be paid such as State Federal Tax, VAT, GRT, Personal Tax. However you can avoid these taxes too. Read this article on how to avoid other US taxes.

Conclusion

In conclusion, US Tax on LLC owned by Non-Resident varies as per your USA company registration and it’s qualification as ETBUS or Non-ETBUS. Having LLC in USA as non-ETBUS can help you save taxes. If you require more assistance regarding limited liability company LLC in usa or US Tax on LLC owned by Non-Resident, feel free to contact our experts at: 8881-069-069.