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U.S. Tax Levels: What You MUST Know Before Selling in the U.S.
- U.S. tax laws are complex, and most non-resident sellers either misinterpret them or overlook key compliance steps, leading to unexpected tax bills, penalties, or IRS audits.
- Understanding U.S. Tax Responsibilities for Foreign Sellers
Your U.S. tax responsibilities depend on how your business operates, including:
Start with the gatekeeper question
Do you have a U.S. trade or business. You are generally taxable on business profits in the United States only if your U.S. activity is considerable, continuous, and regular. A U.S. office or a dependent agent can be evidence of that threshold, but neither is required.
- Using U.S. space that you actually use for the business can support the finding.
- A U.S. dependent agent who habitually concludes contracts or grants concessions can support the finding.
- Recurring core work performed in the United States by you or your staff can support the finding.
- Year-round fulfillment of your own inventory through U.S. facilities is a high-risk pattern even when the provider is independent.
Using independent providers such as Amazon FBA or a true 3PL is not the same as having your own office. Independence matters mainly at the treaty layer and does not erase the domestic analysis.
If USTB exists, check ECI and source.
After you conclude U.S. trade or business, determine whether profit is effectively connected under either the business activities test or the asset use test.
- Purchased goods are generally sourced by place of sale or title passage. U.S. title can produce U.S. source income.
- Produced goods are generally sourced by place of production.
- Foreign source sales can still be effectively connected if attributable to a U.S. office that materially participates.
Treaty overlay
If you are a treaty resident, business profits can be exempt if you have no permanent establishment in the United States. Independent agents typically do not create a permanent establishment. A treaty claim must be disclosed on a timely filed return. Treaties do not bind the states.
Amazon compliance alert
Amazon will not allow you to switch your tax interview from a foreign entity to a U.S. company unless the legal structure is updated correctly. If you form a U.S. single-member LLC that is disregarded, the treaty enterprise remains the foreign owner. Amazon can display the owner’s name rather than the disregarded LLC on your seller profile until the structure and tax records are aligned.
There are three levels of U.S. tax responsibility based on the structure of your business and operational presence. This is a complex subject that requires consulting with a tax professional to ensure compliance and avoid unexpected U.S. tax liabilities.
✔ No U.S. suppliers, inventory, or fulfillment centers.
✔ Ships directly from your home country to U.S. customers.
✔ No U.S. employees or physical operations.
Risk: Many sellers assume they are “exempt” from U.S. taxes, but if any part of their business is considered U.S.-sourced income, they may still have reporting requirements.
USTB first: what facts actually matter
- Do you use any U.S. space that you actually use to run the business (returns room, office, kitting or prep), or is all activity handled by an independent FBA/3PL
- Does anyone in the United States have authority to bind you (accept orders, grant concessions, set terms) as a dependent agent, or are all providers truly independent
- Do you or your staff regularly perform core work on U.S. soil
- Year-round fulfillment of your own inventory through U.S. facilities is a high-risk USTB pattern even if the provider is independent; it is not a per-se rule, but it often tips the analysis
If USTB is likely, test ECI and source
- ECI applies if either the business-activities test is met (U.S. activities materially help earn the income) or the asset-use test is met (U.S. assets, such as your inventory in U.S. facilities, are used to earn the income)
- Purchased inventory is generally sourced by place of sale or title passage; U.S. title often produces U.S. source income
- Produced inventory is generally sourced by place of production
- Foreign-source sales can still be ECI if attributable to a U.S. office that materially participates
Treaty resident
You can be USTB under domestic rules yet have no permanent establishment under a treaty. If you qualify, federal tax on business profits is typically eliminated when you file a timely Form 1040-NR or 1120-F with Form 8833 disclosing the treaty position. Treaties do not bind the states; evaluate state filings separately.
3. U.S. office, employees, or full operations (100% U.S. tax exposure)
If you operate from a U.S. office or other fixed place, employ or engage people in the United States to perform core work, or run meaningful parts of the business from U.S. soil, you will be taxed in the United States. Under domestic law this is a U.S. trade or business with effectively connected income. Under treaties this almost always creates a permanent establishment, so business-profits relief does not apply. Preparatory or auxiliary exceptions are narrow and typically do not cover operating or sales functions.
What this means
- Federal income tax applies on a net basis. A foreign individual files Form 1040-NR. A foreign corporation files Form 1120-F.
- For foreign corporations, branch profits tax may apply on the dividend-equivalent amount in addition to income tax, subject to treaty rate reductions but not elimination.
- U.S. partnerships file Form 1065 and withhold under section 1446 for foreign partners; each foreign partner files its own return.
- Treaty claims such as no permanent establishment are not available when a fixed place is used to carry on the business or a dependent agent habitually concludes contracts.
Engaged in a U.S. Trade or Business (USTOB), Common Misconceptions.
- No U.S. office means no U.S. business. In domestic law an office is not required. Repeated U.S. activity and U.S. inventory use can still produce USTB.
- Amazon is only logistics, so my sales are not U.S.-sourced. Sourcing depends on purchase or production rules, and ECI also looks to whether U.S. assets and activities materially generate the profit
- Using an LLC shields me from U.S. tax. Tax follows the owner classification and the activity. A disregarded SMLLC passes income to the foreign owner. A U.S. corporation is a U.S. taxpayer. Partnerships have their own withholding and partner filing rules
- Independent agent status eliminates U.S. tax. Independence is mainly a treaty concept for permanent establishment. It does not erase domestic USTB or ECI if your U.S. activity and assets meet the tests
The IRS applies the asset-use and business-activity tests to determine effectively connected income once USTB exists, even when there is no leased office. For purchased inventory, the place of sale or title passage often controls the source. For produced inventory, source usually follows the place of production. Foreign source sales can still be effectively connected if they are attributable to a U.S. office that materially participates.
Selling on a Marketplace
Platform reality (tax first): Walmart allows a limited set of foreign countries to sell directly, but most nonresidents will still need a U.S. W-9, meaning a U.S. entity taxed as a partnership or corporation, which triggers Forms 1065 or 1120, possible state franchise or income exposure, and ECI/PE risk if you use WFS or U.S. agents.
TikTok Shop is effectively U.S. only: it requires a W-9, a U.S. Primary Business Representative with SSN and U.S. ID, and a verifiable U.S. address, so plan on a U.S. entity.
Amazon is the most flexible: you can operate with a W-8 (foreign company) or a W-9 (U.S. entity). On the foreign path, budget for an EIN, a possible protective Form 1120-F, and Form 8833 treaty disclosure, plus select state registrations even where the marketplace collects.
On the U.S. entity path, align the W-9, CP-575, and EIN, and file Form 5472 with a pro-forma 1120 for a foreign-owned disregarded LLC, or a full 1120 or 1065 as applicable.
If your foreign company and new U.S. entity will trade goods, services, IP, or loans with each other, transfer pricing rules apply. We set an arm ‘s-length price, sign an intercompany agreement, and document it up front to prevent double tax and IRS penalties.
Filing a Protective Return. Why CPAs Diverge.
Why some CPAs recommend a protective filing
- Preserve deductions. Without a timely filing the IRS can disallow deductions if it later asserts USTB.
- Start the statute. A timely return limits how long the IRS can assess.
- Facts drift. Mid year a U.S. helper may gain authority, a returns space may be used, or inventory patterns may change.
- Reduce notices. Returns align with marketplace and processor data and reduce mismatch letters.
Why some CPAs do not file protectively
- Facts are clearly outside USTB and ECI and the client maintains evidence of that position.
- Cost and administrative load do not justify a filing when exposure is remote.
- The client prefers to reserve filings for years with clear U.S. exposure.
Protective return mechanics
- Foreign corporation as taxpayer. File Form 1120 F protectively with a statement preserving deductions under the timely filing rules.
- Foreign individual as taxpayer. File Form 1040 NR protectively with a statement preserving deductions.
- Foreign owned disregarded SMLLC. File Form 5472 with a pro forma 1120 only in years with reportable related party transactions such as funding, reimbursements, intercompany payables, or loans. This is separate from any 1040 NR or 1120 F.
- Partnerships are different. When there is ECI a partnership must handle section 1446 withholding and issue Forms 8804 and 8805. A pure protective 1065 without ECI is sometimes used to align information flows.
Treaty overlay
If you claim a no permanent establishment position attach Form 8833 to the taxpayer return. Penalties can apply for failing to disclose a treaty position. Protective status does not remove the disclosure requirement. Treaties do not bind the states, so complete a separate state nexus review.
Misconceptions to avoid
- No U.S. tax due means skip the return. Filing can still be prudent when uncertainty exists.
- Protective filings are only for big corporations. Individuals use them as well when facts are evolving.
- No U.S. office means safety. USTB does not require an office. Repeated U.S. activity and U.S. inventory use can trigger USTB and ECI. Treaty PE is a separate analysis.
Decision cues for a protective filing
- FBA or 3PL will be used with year round inventory cycles and facts are not yet fully documented.
- Any U.S. person may gain authority to bind orders or concessions or a U.S. space may be used during the year.
- Treaty claim is expected but LOB or residency documentation will only be available after year end.
- State nexus is likely from inventory or sales thresholds and returns will be filed at the state level.
Bottom line
Protective Forms 1040 NR or 1120 F, with Form 8833 when a treaty position is claimed, preserve deductions, start the statute, and reduce notice risk while you finalize the USTB, ECI, treaty, and state conclusions. Choose the approach that fits your facts and risk tolerance and document why.
Non-Resident Selling on Amazon Without a Tax Treaty
Non-resident selling on Amazon without a tax treaty
Selling on Amazon FBA as a non-resident without a U.S. tax treaty means there are no treaty benefits to reduce or eliminate federal tax on business profits. If your activity is a U.S. trade or business and your profit is effectively connected income, it is taxed at normal U.S. rates on a net basis. It must be reported by the taxpayer (Form 1040-NR for a foreign individual, Form 1120-F for a foreign corporation). Failing to file on time can jeopardize deductions and lead to assessments that resemble tax on gross receipts with penalties and interest.
Common misconceptions for no-treaty sellers
- No U.S. office means no U.S. tax. Domestic law does not require an office. The question is whether your U.S. activity is regular, continuous, and meaningful. Year-round FBA use of your inventory is a high-risk USTB pattern, though not a per-se rule.
- Amazon is only logistics, so my sales are not U.S.-sourced. Sourcing depends on purchase or production rules, and ECI also considers whether U.S. assets and activities materially generate profit.
- An LLC shields me from U.S. tax. Tax follows the owner and the activity. A disregarded SMLLC passes income to the foreign owner; a U.S. corporation is a U.S. taxpayer; partnerships have their own withholding and partner-filing rules.
- Leaving money in the LLC means I do not report it. U.S. tax is based on where profit is earned and connected, not where cash is held.
Key compliance questions
- Are you engaged in a U.S. trade or business based on an overall pattern of U.S. activity?
- If yes, does the profit meet either the business-activities test or the asset-use test for effectively connected income? FBA often does so because your U.S. inventory and fulfillment are used to generate income.
- Have you filed the correct return for the taxpayer type? Foreign individual files Form 1040-NR. Foreign corporation files Form 1120-F.
- For a foreign-owned disregarded SMLLC, have you filed Form 5472 with a pro-forma 1120 in years with reportable related-party transactions such as funding, reimbursements, intercompany payables, or loans?
- Have you evaluated state income, franchise, and sales or use tax nexus created by inventory locations and economic thresholds?
Bottom line
Without treaty protection, assume U.S. profits are taxable when your FBA facts indicate a U.S. trade or business and effectively connected income. File the required federal returns on time, complete any SMLLC information filings when applicable, and plan for state-level obligations to avoid costly reassessments. Where facts are evolving, a protective filing can preserve deductions and start the statute while you finalize the position.
Does Selling on Amazon as a Foreign Entity Create a Permanent Establishment?
Expanding to Amazon FBA as a foreign corporation raises Permanent Establishment considerations under your treaty. A PE can expose you to U.S. corporate income tax and additional compliance even if domestic rules would otherwise be favorable.
Common misconceptions about PE
- “No U.S. office means PE rules never apply.” A fixed place is one route to PE, but a dependent agent with authority can also create PE.
- “Amazon FBA can never create a PE because it is third-party.” Storage and delivery by an independent platform are generally preparatory or auxiliary, but facts that go beyond storage can change the analysis.
- “If I do not sign contracts in the U.S., there is no risk.” A U.S. person who habitually negotiates or concludes contracts for you can be a dependent agent even if you do not personally sign in the U.S.
Key factors that can trigger PE status
- Fixed place of business. Inventory stored in Amazon-owned fulfillment centers is generally treated as storage for delivery and, by itself, is typically preparatory or auxiliary under many treaties. A leased warehouse, office, or returns/prep space at your disposal and used to run the business can be a fixed place.
- Dependent agent. A U.S. based person who habitually concludes contracts, or plays the principal role leading to their conclusion and they are routinely approved without material change, can create a PE under many treaties.
Important considerations
- A foreign corporation using Amazon FBA should test PE under its treaty. If you conclude there is no PE, you disclose the no-PE position on a timely filed Form 1120-F with Form 8833 and, federally, business profits are typically not taxed.
- A U.S. single-member LLC that is disregarded does not, by itself, decide the PE outcome. If the owner is a foreign corporation, the LLC’s U.S. activities are treated as the corporation’s U.S. branch and may constitute a PE depending on the treaty tests. If the owner is a foreign individual, the PE analysis applies to that individual’s enterprise. There is no “by definition” PE—facts control.
- Treaties do not bind U.S. states. Even with no PE federally, states can impose income or franchise taxes based on inventory or economic nexus, and marketplaces do not eliminate every state obligation.
- If PE exists, a foreign corporation owes U.S. corporate tax on net profits attributable to the PE and may be subject to branch profits tax on the dividend-equivalent amount, often at a treaty-reduced rate.
Bottom line: Know when fixed places, dependent agents, or U.S. branch operations cross the treaty PE line. File Form 1120-F on time, attach Form 8833 for any treaty claim, and complete a separate state nexus review to avoid unexpected tax and penalties.
- Fixed place of business (office, employees, factory)
- Presence of dependent agents who have the authority to execute contracts (e.g., a sales agent who travels to the U.S. frequently to conclude contracts).
- Providing services in the U.S. for more than a specified period (e.g., 183 days under many treaties)
- Ownership of U.S. located assets, equipment, or real estate
A U.S. corporation pays U.S. taxes
Forming a U.S. corporation does not remove tax or compliance. Once you operate as a U.S. corporation, you are a domestic taxpayer and file Form 1120 every year. A domestic corporation is generally taxed at 21 percent on its worldwide income, with normal deductions and credits, regardless of who owns the stock or where the owners live.
Common misconceptions about U.S. corporations
- Owning a U.S. corporation avoids personal U.S. tax. Corporate-level tax still applies, and distributions to foreign shareholders are generally subject to U.S. withholding tax on dividends at 30 percent, unless reduced by a treaty.
- Forming a corporation automatically lowers the U.S. tax burden. It changes the tax base and rate but adds a second layer when profits are distributed; model corporate tax plus dividend withholding versus pass-through options.
- Having a U.S. entity removes home-country filings. Your country may treat the company as locally managed and controlled or apply CFC or participation rules; coordinate with home-country advisors.
Key tax considerations
- Flat 21 percent federal corporate rate on worldwide income, with foreign tax credit rules for foreign-source income and normal netting of expenses.
- An LLC can elect corporate status on Form 8832; once effective, it follows the same corporate rules. S corporation status is generally not available if any shareholder is a nonresident alien.
- A U.S. corporation does not rely on business-profits treaty relief for federal income tax; treaties mainly affect withholding on outbound payments such as dividends and interest.
- Branch profits tax does not apply to a U.S. corporation; that tax targets foreign corporations with a U.S. branch.
- Distributions to foreign shareholders are typically subject to a 30 percent withholding tax unless a treaty reduces the rate; coordinate payor withholding and documentation.
- States are separate. Expect state income or franchise tax where you have nexus, plus sales and use tax obligations as applicable.
Foreign sellers often misread the consequences of incorporating. A U.S. corporation can simplify marketplace onboarding and W-9 requirements, but it adds corporate reporting, potential double taxation on distributions, state filings, payroll compliance if you hire, and information reporting. Model the full cost before electing corporate status and coordinate with home-country advisors to avoid unexpected tax in both jurisdictions.
A U.S. LLC taxed as a partnership is a popular choice for foreign sellers because it creates a U.S. tax presence for platforms like Amazon (optional) and Walmart (required). However, foreign-owned partnerships have strict withholding and filing obligations that many sellers overlook.
Common Misconceptions About Foreign-Owned Partnerships
- “A partnership doesn’t owe U.S. taxes since it’s a pass-through entity.”
- “If I don’t take money out of the business, I don’t need to file a tax return.”
- “Withholding tax only applies if the LLC has U.S. employees.”
Key U.S. Tax Considerations for Foreign-Owned Partnerships
- The partnership itself does not pay U.S. taxes, but foreign partners are subject to withholding tax on their share of Effectively Connected Income (ECI) at a rate of 37% (or the highest individual tax rate).
- Partnerships with foreign partners must withhold and pay estimated taxes throughout the year, even if no cash distributions are made.
- The IRS requires Forms 8804 and 8805 to report withholding tax liability and partner allocations.
- Foreign partners must file a U.S. tax return (Form 1040-NR or 1120-F) to claim deductions, credits, or treaty benefits.
Many sellers misunderstand the tax obligations of a partnership, leading to penalties for failing to withhold or file correctly.
Not sure if a partnership is the right structure for your business? Book a Free Discovery Call.
A Deeper Look at Engaged in a U.S. Trade or Business
Whether a non-resident is engaged in a U.S. trade or business is not a single-factor test. The IRS looks at the total pattern of U.S. activity and asks whether it is regular, continuous, and meaningful. Many sellers assume they are outside the rules and later face assessments when facts show a sustained U.S. footprint.
Common misconceptions about USTB classification
- “If I do not have a U.S. office, I do not have a USTB.” A leased office is not required; the overall pattern of U.S. activity controls.
- “Amazon FBA is only logistics, so my business is not U.S.-based.” FBA can be a high-risk indicator because your own inventory and U.S. fulfillment are used to earn the income.
- “If I ship to the United States but live abroad, I do not owe U.S. tax.” If your activity rises to a USTB and profit is effectively connected, U.S. filing and tax can apply regardless of residence.
Key factors the IRS considers
- Substantial activity: reliance on U.S. operations beyond isolated or occasional sales.
- Continuous and regular operations: recurring sales, fulfillment, or services directed at the U.S. market.
- Use of U.S. assets and people: inventory stored and fulfilled from U.S. facilities, a fixed place you use, recurring in-country work by you or staff, or a U.S. person with authority to bind terms.
How USTB connects to ECI
First decide USTB. If USTB exists, income is effectively connected if either test is met:
- Business-activities test: U.S. activities were a material factor in producing the income.
- Asset-use test: income was produced by assets used or held for use in the U.S. business, such as your inventory in U.S. fulfillment centers.
FBA by itself is not an automatic rule, but year-round fulfillment of your own inventory commonly satisfies one or both tests in practice. Sourcing rules still apply: purchased inventory is generally sourced by place of sale or title passage, produced inventory by place of production, and foreign-source sales can still be effectively connected if attributable to a U.S. office that materially participates.
What happens if you are USTB
- Your U.S.-connected profit is taxed on a net basis as effectively connected income.
- File the correct federal return: Form 1040-NR for nonresident individuals or Form 1120-F for foreign corporations.
- Foreign corporations that are unsure may file a protective Form 1120-F on time to preserve deductions and limit open-ended assessment periods.
Treaty and state overlays
If you are treaty resident, you can be USTB domestically yet owe no federal tax on business profits if you have no permanent establishment. You disclose the treaty position on a timely Form 1040-NR or Form 1120-F, along with Form 8833. Treaties do not bind the states; inventory and sales thresholds can still trigger state income, franchise, sales, or use tax filings.
Common misconceptions about USTB classification
- “If I form a U.S. LLC, I am automatically engaged in a U.S. trade or business.” Entity formation alone does not decide USTB.
- “Having a U.S. bank account means I owe U.S. taxes.” Banking access is not determinative of USTB or ECI.
- “Amazon FBA always creates a USTB.” FBA is high-risk, but not a per-se rule; the overall pattern of U.S. activity controls.
What actually determines USTB
- Totality of activities: the IRS looks at the overall pattern of U.S. activity, not just formation or banking.
- Continuity and scale: recurring sales, fulfillment, returns handling, or in-country work point toward USTB.
- Use of U.S. assets and people: inventory stored and fulfilled from U.S. facilities, a place at your disposal, or a U.S. person with authority to bind terms are key facts.
How ECI fits after USTB
Only after USTB exists do you test effectively connected income. Profit is effectively connected if either the business-activities test is met (U.S. activities materially help earn the income) or the asset-use test is met (U.S. assets, such as your inventory in U.S. facilities, are used to earn the income). Purchased inventory is generally sourced by place of sale or title passage and produced inventory by place of production; foreign-source sales can still be effectively connected if attributable to a U.S. office that materially participates.
Treaty and state overlays
A treaty can block federal tax on business profits when there is no permanent establishment and the position is disclosed on a timely return. Treaties do not bind the states; inventory and sales thresholds can still create state income or franchise and sales or use tax obligations.
Misreading USTB can lead to unnecessary filings when there is no U.S. exposure, or to penalties when exposure is ignored. If you want a quick fit assessment to see whether a paid consultation makes sense, request a short discovery call and bring a one-page summary of your U.S. activities, inventory flow, and any prior filings.
Sales Tax Compliance
Marketplace rules help, but they do not erase your obligations. Most states require marketplace facilitators to collect and remit sales tax on facilitated sales. That does not always remove the seller’s duties. If you place inventory in U.S. warehouses or meet a state’s economic nexus threshold, some states still require the seller to register, maintain an account, and in some cases file zero returns for marketplace sales. Plan for the basics: U.S. EIN, a verifiable U.S. address, state registrations, and periodic filings.
Foreign company path. If you sell as a foreign entity using a W-8, expect to obtain an EIN and complete state sales tax registrations where a physical or economic nexus exists. For federal income tax, many non-resident sellers also plan a protective Form 1120-F and a Form 8833 treaty disclosure when applicable. Sales tax and income tax are separate systems, so you can have sales tax registration requirements even while your federal income tax position is under a treaty.
Branch Profits
The branch profits tax (BPT) applies when a foreign corporation has a Permanent Establishment (PE) in the U.S. and repatriates income from a U.S. branch. The tax rate is 30%, unless reduced by a treaty.
Common Misconceptions About Branch Profits Tax
- “Selling on Amazon means I owe branch profits tax.”
- “If I have a U.S. entity, I must pay branch profits tax.”
- “Branch profits tax and dividend withholding tax are the same thing.”
Key Considerations for Foreign Corporations
- Most foreign e-commerce sellers do not owe branch profits tax unless they have a fixed place of business or dependent agents in the U.S.
- Branch profits tax is different from dividend withholding tax. If a foreign corporation owns a U.S. subsidiary, dividends paid to the foreign parent are typically subject to withholding tax (often 30%, reduced by tax treaties).
- Determining tax exposure requires analyzing entity structure, treaty benefits, and international tax rules.
Many foreign sellers misinterpret the tax treatment of hybrid entities and U.S. branches, leading to unnecessary filings, incorrect tax payments, or compliance issues.
Unsure how your structure impacts U.S. and foreign tax obligations? Schedule a Discovery Call to learn about our services and how we can assist with compliance.
What is the branch profits tax rate?
The Branch Profits Tax (BPT) is a 30% tax on the after-tax earnings of a foreign corporation’s U.S. trade or business, unless a tax treaty reduces or eliminates the rate. It applies when U.S. earnings are repatriated—or deemed repatriated—to the foreign parent company.
Common Misconceptions About Branch Profits Tax
- “The branch profits tax applies to all foreign companies selling in the U.S.” → False – Most e-commerce sellers using a U.S. LLC do not trigger BPT unless they operate as a U.S. branch of a foreign corporation.
- “If I don’t take money out of the U.S., I don’t owe branch profits tax.” → False – Even if funds are retained in the U.S., they may be deemed repatriated if not reinvested into U.S. operations.
- “Branch profits tax and dividend withholding tax are the same.” → False – BPT applies to U.S. branch earnings of a foreign corporation, while dividend withholding tax applies to distributions from a U.S. corporation to foreign shareholders.
When Does the Branch Profits Tax Apply?
- A foreign corporation must have a U.S. Trade or Business (USTOB) and a Permanent Establishment (PE) under a tax treaty.
- BPT applies when a foreign corporation’s U.S. branch earnings are repatriated or deemed repatriated to the parent company.
- Reinvesting profits into the U.S. operations may defer BPT, but proper structuring is required.
Key Takeaway: Avoid Misclassification & Unnecessary Tax Payments
Foreign corporations operating in the U.S. should carefully evaluate their tax structure to determine if BPT applies. Failure to plan properly can result in unnecessary tax payments or compliance risks.
Need expert guidance on your U.S. tax exposure? Book a Discovery Call to see if a paid consultation is the right next step for your business.
Reduction with a U.S. Tax Treaty
Many U.S. tax treaties include provisions that reduce the branch profits tax (BPT) rate, but the reduction varies by country and is not automatic. Some treaties lower the rate to as little as 5%, while others provide no reduction at all.
Common Misconceptions About Treaty Benefits for BPT
- “All tax treaties reduce or eliminate branch profits tax.” → False – Some treaties do not provide any reduction.
- “If my country has a tax treaty with the U.S., I automatically qualify for a lower BPT rate.” → False – Certain conditions must be met to claim treaty benefits.
- “I don’t need to review the tax treaty because my CPA will handle it.” → False – Many advisors misinterpret treaty provisions, leading to misclassification or missed tax savings.
Key Considerations for Tax Treaty Reductions
- Each country’s treaty is different—not all treaties reduce the 30% standard BPT rate.
- To claim a lower rate, a foreign corporation must qualify under the treaty’s “Limitation on Benefits” (LOB) provisions.
- Misinterpreting tax treaty rules can lead to unexpected tax liabilities or IRS challenges.
How to Determine If Your Business Qualifies for a Reduced BPT Rate
Understanding whether your business can claim a reduced branch profits tax rate requires a detailed analysis of the U.S. tax treaty with your home country.
Transfer Pricing for Cross-Border Sellers
Transfer Pricing: How Bigger Sellers Lose Money Quietly (and How to Fix It)
When a foreign company and a U.S. entity both touch the customer journey, who earns what matters more than your articles of organization?
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Choose the right model: Buy-sell distributor, commissionaire, or services/marketing support. Each has different margin expectations and audit risk.
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Document the split: Intercompany service agreements, royalty/license terms (if brand IP is foreign), and supporting benchmarks.
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Price to the risk: Inventory, returns, and U.S. people typically deserve more profit than “light” support roles.
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Protect the posture: Keep contemporaneous files (TP memo/benchmarks). If asserting no PE at the foreign level, ensure that U.S. activity is truly auxiliary; otherwise, move it and charge for it.
Who this is for: brands doing $1M–$20M+ who want to minimize global tax while passing U.S. scrutiny and platform checks.
State Income Taxes
State income taxes are more involved than sales tax because U.S. tax treaties do not cover state taxes.
Several factors come into play, and only a few states may require an additional filing beyond sales tax. For example, in Washington, a Business and Occupation tax (B & O tax) return must be filed with a tax rate of 0.471% (.00471) of your gross receipts. This is not collected and paid by the marketplace, i.e., Amazon.
Illinois has a retailer’s occupancy tax (ROT) for intrastate sales, which is not paid by the marketplace. This does not require an additional tax return but requires the marketplace seller to pay some taxes out of pocket. The ROT tax ranges from 2-4% on all intrastate sales into the state.
California and Texas have a required franchise tax fee, even if operating at a loss. Florida is a state where it is recommended for C corporations to foreign qualify to file a state corporate income tax return if they are collecting and remitting sales tax in the state.
If you have a sales tax nexus in most states, that does not automatically mean you also have an income tax nexus. A three-factor test is applied: sales income, assets owned, and payroll.
Filing Your U.S. Tax Returns
We coordinate the plan; independent CPAs/attorneys sign opinions and file returns. Tell us your risk tolerance, volume, and tech stack. We’ll introduce 1–3 vetted options. You engage them directly.
Risk bands:
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Conservative: treaty-friendly, protective filings, robust TP docs
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Balanced: efficiency + defendable positions, tight documentation
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Aggressive: documented, higher-yield positions where facts support (tax attorney that defends you in an IRS audit)
Note: Education & coordination only, not legal/CPA advice, and not a tax opinion.
Other income is subject to U.S. tax, EVEN if NOT connected to a trade or business
FDAP Income: FDAP income is subject to U.S. federal income tax even if it is not connected to a U.S. trade or business (USTOB). This includes passive income like interest, dividends, rents, royalties, and certain commissions. Typically, FDAP income is taxed at a flat 30% rate on a gross basis, unless reduced by a tax treaty between the U.S. and the foreign person’s home country.
Tax on Nonresident Aliens: Nonresident aliens (NRAs) are subject to U.S. tax only on their U.S.-source income. FDAP income, which is not connected to a USTOB, is taxed at the 30% withholding rate, and no deductions are allowed. For effectively connected income (ECI), which includes wages and income from a trade or business in the U.S., NRAs must file Form 1040NR and can claim deductions similar to U.S. residents.
Form 1040NR Filing Obligations: Nonresident aliens with ECI must submit Form 1040NR. However, if their only income is wages below the personal exemption threshold or if they only earn passive income on which the proper withholding was applied (reported on Form 1042-S), no U.S. tax return may be required unless they are claiming a tax treaty benefit to reduce withholding.
Tax Professionals Required
Partnering with the Right Tax Professionals for Your U.S. Expansion
Navigating U.S. tax regulations as a non-resident requires expert guidance to avoid costly mistakes, unnecessary filings, or IRS penalties. At NCP, we ensure that you have the right strategy in place before you form your U.S. entity.
As part of our client onboarding process, we provide essential training and connect you with trusted tax professionals specializing in U.S. taxation for foreign entrepreneurs. These professionals operate independently from NCP with separate fees, but we have vetted them to ensure they have the expertise to support your business right from the start.
The wrong tax structure can cost you thousands. Before you move forward, let’s make sure your foundation is solid. Book a Discovery Call to see if a strategy call or verified plan is your next step.
Learn more at our free U.S. tax master class at this link.
Legal Disclaimer: NCP does not provide tax, legal, or accounting advice. This website has been prepared for informational purposes and is not intended to provide, and should not be relied on for, tax, legal, or accounting advice. You should consult your tax, legal, and accounting advisors before engaging in any transaction.