U.S. Tax Responsibilities for Non-Resident E-Commerce Sellers

Clarify your U.S. tax obligations

U.S. Tax Levels

  • There are two levels of tax: federal and state taxes. To better understand any applicable U.S. income tax laws, you must first understand the different U.S. tax system levels.
  • You will want to understand how your U.S. earned income should be taxed. To do that, you will have to determine the degree of your company's involvement in the U.S.
[U.S. TAX MASTER CLASS] 4 U.S. Tax & E-Commerce Compliance Traps
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Understanding U.S. Tax Responsibilities for Foreign Sellers

Foreign Entity Selling into the U.S. or a U.S. LLC Owned by a Foreign Entity
Your U.S. tax responsibilities will depend on whether you are operating as a foreign business selling into the U.S. or a U.S. Single-Member LLC (SMLLC) owned by a foreign individual or entity. The tax implications vary significantly between these two structures.

If you are a foreign company (e.g., a Canadian or Australian corporation) selling directly into the U.S., your tax obligations depend on whether you have a Permanent Establishment (PE) under a tax treaty, which could make your U.S. income taxable.
If you are operating through a U.S. SMLLC, tax treaties do NOT apply to eliminate U.S. taxes because the LLC is already considered a U.S. business entity.

Key Amazon Compliance Reminder: Amazon will NOT allow you to change your legal business structure to a U.S. company unless you update the tax interview and legal entity properly. Additionally, a Single-Member LLC (Disregarded Entity) will NOT display the LLC’s name on your Amazon seller profile, only the owner’s name.

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.

A non-resident owns a U.S. Single-Member LLC (SMLLC) Disregarded Entity but does not store inventory in the U.S. or use any U.S. suppliers.

All inventory is shipped from outside the U.S. (e.g., directly from Canada, UK, or Australia) to the customer. The business has no U.S. employees, no physical presence, and no contracts signed in the U.S. Because the seller has no regular, continuous, and substantial activity in the U.S., they do not meet the U.S. Trade or Business (USTOB) definition under IRS rules.

Additionally, because no U.S. assets (such as warehouses or employees) are used to generate income, there is no Effectively Connected Income (ECI). This means no U.S. income tax is due.

However, Form 5472 and a Pro Forma 1120 must still be filed annually to report foreign ownership of the U.S. LLC.

If the seller later begins storing inventory in the U.S. or fulfilling orders from a U.S. location, this classification could change, and U.S. tax obligations could apply.

A non-resident owns a U.S. SMLLC that sells products through Amazon FBA, meaning inventory is stored in Amazon fulfillment centers in the U.S. and orders are fulfilled from within the U.S. The business has no U.S. employees, no physical office, and no direct contracts signed in the U.S., but it continuously sells to U.S. customers.

The IRS Asset-Use Test confirms that income derived from U.S.-based inventory is ECI, and the Business Activities Test confirms that Amazon FBA operations qualify as regular, continuous, and substantial business activity. As a result, the seller is engaged in a U.S. Trade or Business (USTOB) and has Effectively Connected Income (ECI), making U.S. tax payments mandatory.

The seller must file Form 1040-NR and pay U.S. tax on net profits.

Form 5472 and Pro Forma 1120 are still required as the LLC is foreign-owned. Form 8833 is NOT required because tax treaties do NOT override U.S. taxation of ECI.

To avoid double taxation, non-residents who pay U.S. taxes on Effectively Connected Income (ECI) can typically claim a Foreign Tax Credit (FTC) in their home country. This is done by filing Form 1116 with Form 1040-NR, which allows them to offset U.S. taxes against their home country tax liability. However, not all countries allow a full foreign tax credit, so sellers should confirm with their tax professional whether their country provides an FTC for U.S. taxes paid.

Note: A foreign corporation selling on Amazon at level 2, if the IRS could argue that a USTOB exists but the company has no Permanent Establishment (PE) under a tax treaty, would file Form 8833 with Form 1120-F to claim treaty benefits and prevent U.S. taxation.

Common Misconceptions About U.S. Taxes for Amazon FBA Sellers:

Many sources claim that if a business has no dependent agents in the U.S., then no U.S. tax is due. Others argue that because Amazon is an independent contractor, sellers do not have ECI. However, these interpretations fail to account for the IRS’s Asset-Use Test, which states that income generated from U.S.-based assets (such as inventory stored in Amazon FBA warehouses) is considered ECI.

A non-resident owns a U.S. SMLLC that sells through Amazon FBA but also leases a U.S. office or hires U.S. employees. The business now has a fixed place of business in the U.S., removing any doubt about USTOB and ECI status.

Once a U.S. office or employees are involved, the IRS automatically assumes full U.S. tax liability—there is no longer a need to analyze USTOB or ECI separately.

A U.S. LLC is already a U.S. entity for tax purposes, meaning tax treaties do NOT apply to reduce or eliminate U.S. tax liability. The seller must file Form 1040-NR and pay U.S. taxes on net profits, as well as meet state tax and payroll tax obligations.

The Foreign Tax Credit (FTC) using Form 1116 still applies at Level 3, but sellers should consult a tax professional in their home country to confirm whether their FTC eligibility changes due to a U.S. office or employees.

Engaged in a U.S. Trade or Business

A U.S. Trade or Business (USTOB) determination depends on whether a company is engaged in regular, continuous, and substantial activity in the U.S. If your company sells on Amazon.com but ships products from outside the U.S. without storing inventory in the U.S. or having employees, an office, or dependent agents, this generally does not constitute being engaged in a U.S. trade or business.

However, if you use Amazon FBA and store inventory in U.S. warehouses, the IRS Asset-Use Test confirms that you likely have USTOB. Additionally, even if you are not engaged in a USTOB, you may still need to file certain U.S. tax forms, such as Form 5472 and a pro forma Form 1120, if your LLC is foreign-owned.

The Impact of the Tax Cuts and Jobs Act (TCJA) on U.S. Sourcing Rules

The Tax Cuts and Jobs Act (TCJA) of 2017 changed how inventory sales are sourced to the U.S. Previously, sourcing rules were based on the “title passage rule,” meaning income was generally sourced where the title to goods was transferred. After 2017, the “place of sale rule” became the primary factor, shifting focus to where the customer takes possession of the goods.

What This Means for Amazon Sellers:

  • Sales to U.S. customers are generally considered U.S.-sourced income, regardless of where the inventory was originally shipped from.
  • If inventory is stored in the U.S. and sold to U.S. customers, the income is U.S.-sourced and may be classified as Effectively Connected Income (ECI).

Foreign-Owned U.S. Single-Member LLCs (SMLLCs) & Tax Filing Obligations

A U.S. Single-Member LLC (SMLLC) is treated as a disregarded entity for U.S. tax purposes. If the LLC is foreign-owned, Form 5472 and a pro forma Form 1120 must be filed annually, even if no federal taxes are due.

Important Amazon Compliance Consideration:
If you are considering changing the legal entity on your Amazon account, be cautious. A single-member LLC will NOT allow you to update your legal name once your Amazon account is already established.

What Amazon Sellers Need to Do to Ensure U.S. Tax Compliance

If You Sell on Amazon Without U.S. Inventory or Presence (No USTOB or ECI):

  • File Form 5472 & Pro Forma 1120 (required for all foreign-owned LLCs).
  • No U.S. tax return (1040-NR) is required since no U.S. tax is due.

If You Sell on Amazon FBA with U.S. Inventory (USTOB & ECI Confirmed):

  • File Form 1040-NR & pay U.S. taxes on net income.
  • File Form 1116 along with 1040-NR for a foreign tax credit (if allowed in your country).
  • File Form 5472 & Pro Forma 1120 (foreign-owned SMLLCs).
  • Do NOT file Form 8833 (tax treaties do NOT override U.S. taxation of ECI).
  • Use a Foreign Tax Credit (FTC) in your home country to prevent double taxation.

If You Have a U.S. Office or Employees (Full U.S. Taxation):

  • File Form 1040-NR & pay U.S. taxes (no treaty benefits apply).
  • File Form 1116 along with 1040-NR for a foreign tax credit (if allowed in your country).
  • File Form 5472 & Pro Forma 1120 (foreign-owned SMLLCs).
  • Comply with state & payroll tax obligations.

Amazon FBA sellers with U.S. inventory should assume they have USTOB & ECI and must file U.S. taxes. If you’re unsure about your U.S. tax obligations, book a consultation before making tax decisions that could result in IRS penalties.

Selling on Amazon.com FBA or Walmart

Walmart sellers must file a W-9 as a U.S. taxpayer, which means filing a U.S. LLC taxed as a corporation, partnership, or a U.S. corporation. In this situation with a U.S. taxpayer, U.S. taxes will be paid on U.S. profits, and depending on your treaty, benefits will determine the amount of tax paid in your country on the U.S. profits.

Walmart has several other requirements, including extensive e-commerce experience is required.

Filing a Protective Return

Foreign entities selling on Amazon.com may face uncertainty in determining whether they have a U.S. Trade or Business (USTOB) or Effectively Connected Income (ECI). Filing a protective U.S. federal tax return (Form 1120-F) allows a foreign company to preserve its right to claim deductions and limits the IRS’s ability to audit indefinitely.

A protective Form 1120-F is only applicable to foreign corporations, not to U.S. LLCs, which are already considered U.S. entities.

When Should a Foreign Corporation File a Protective Return?

A foreign corporation may file a protective Form 1120-F if it may be engaged in a U.S. Trade or Business (USTOB) but is uncertain whether its income is taxable as Effectively Connected Income (ECI).

A protective return may be necessary when:

  • Threshold Activities Exist

    • Business activities in the U.S. may approach the threshold of being classified as USTOB.
    • Examples include:
      • Using Amazon FBA (U.S. fulfillment centers) for inventory storage and order fulfillment.
      • Engaging with U.S.-based agents for customer service or fulfillment.
    • Even without a dependent agent in the U.S., the continuous and regular nature of selling on Amazon could still create a USTOB classification.

  • Uncertainty About ECI

    • If it is unclear whether income is ECI, filing a protective return preserves the right to claim deductions.
    • Without filing, the IRS could later determine that the company has ECI but deny deductions, taxing the business on gross income instead of net profit.

  • Statute of Limitations Protection

    • Filing a protective return starts the IRS’s statute of limitations.
    • Without filing, the IRS may have an indefinite period to assess back taxes, penalties, and interest.

A foreign corporation using Amazon FBA should consider filing a protective return to avoid future IRS disputes over deductions and USTOB classification. Failing to file could allow the IRS to assess tax on gross receipts without allowing deductions.

Impact of a U.S. Office on Protective Returns

If a foreign entity establishes a U.S. office, such as for Shopify Payments or other operations, this eliminates the protective return discussion entirely.

A U.S. office establishes a Permanent Establishment (PE), meaning full U.S. tax liability applies and no treaty exemption is available. Instead of filing a protective return, the foreign entity must file a full U.S. tax return (Form 1120-F) and pay U.S. taxes on its effectively connected income (ECI). Protective returns are meant to preserve tax positions for businesses that may have USTOB but no Permanent Establishment (PE).

If a foreign entity leases a U.S. office, it must file Form 1120-F as a standard tax return and pay U.S. taxes. A protective return is not relevant in this case.

Practical Implications of Filing a Protective Form 1120-F

Why Filing a Protective Return Can Be Beneficial

  • Preserves the right to claim deductions if later classified as USTOB and ECI.
  • Limits the IRS’s ability to audit indefinitely.
  • Allows a foreign corporation to proactively disclose business activity to the IRS, avoiding severe penalties later.

What Are the Risks of Filing a Protective Return?

  • Increased IRS scrutiny: Filing a protective return may attract IRS attention to the company’s U.S. business operations.
  • Failure to file a proper return later: If the IRS later determines the company has USTOB and ECI, failing to file a full Form 1120-F on time could lead to denied deductions and taxation on gross receipts.

For foreign corporations with Amazon FBA, the benefits of filing a protective return usually outweigh the risks.

What Happens If a Foreign Corporation Does Not Have a U.S. EIN?

If a foreign entity does not have an EIN, it may:

  • Delay IRS Filing Expectations

    • Without an EIN, the IRS may not immediately expect a tax return.
    • However, this does not eliminate potential future tax liabilities if the IRS determines that U.S. tax obligations exist.

  • Face Compliance Challenges

    • If the IRS later determines USTOB and ECI exist, the lack of an EIN and failure to file could result in penalties.
    • The IRS could tax the company on gross receipts without allowing deductions.

  • Encounter Difficulty in Correcting Tax Compliance Later

    • Once a tax liability is determined, late filings and penalties could increase.
    • Having an EIN and filing on time reduces compliance risks.

Foreign entities selling on Amazon FBA should obtain a U.S. EIN and evaluate whether filing a protective return is necessary.

Practical Steps for Amazon Sellers

Foreign sellers on Amazon.com should:

  • Evaluate Business Activities

    • Determine if using U.S. fulfillment centers or warehouses creates USTOB.
    • Assess whether activities are considerable, continuous, and regular—indicators of USTOB classification.

  • Obtain a U.S. EIN

    • Even if a protective return is not immediately required, having an EIN simplifies compliance if U.S. tax obligations arise.

  • Consult a Tax Professional

    • Seek guidance to determine if filing a protective return is necessary based on business model and risk factors.

If a foreign company has potential USTOB exposure, filing a protective return may be the safest approach to preserve deductions and limit IRS scrutiny.

Why This Matters for Amazon Sellers

For foreign Amazon sellers, navigating U.S. tax obligations is critical to avoid unexpected liabilities. Filing a protective return may provide peace of mind by establishing compliance and limiting potential penalties.

Foreign corporations using Amazon FBA should consider filing a protective Form 1120-F to preserve deductions and limit IRS audit exposure. Not having an EIN does not eliminate IRS tax obligations—foreign entities should proactively obtain one. Leasing a U.S. office removes the need for a protective return and requires full U.S. tax compliance. Filing a protective return may increase IRS scrutiny, but the ability to claim deductions typically outweighs the risks.

Foreign corporations selling on Amazon should proactively assess their U.S. tax obligations. Filing a protective Form 1120-F can help ensure compliance and prevent future tax disputes. If unsure, book a tax consultation before making tax decisions that could result in IRS penalties.

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Non-Resident Selling on Amazon via FBA: U.S. Tax Considerations Without a Tax Treaty

If you are a non-resident selling on Amazon via FBA through either a foreign entity or a U.S. Single-Member LLC (SMLLC) disregarded for tax purposes, and your country does not have a tax treaty with the U.S., you must carefully evaluate your U.S. tax obligations. The absence of a tax treaty means that there are no treaty benefits to reduce or eliminate U.S. taxation, potentially resulting in full exposure to U.S. tax on your U.S.-sourced income.

1. Determining Whether You Are Engaged in a U.S. Trade or Business (USTOB)

A non-resident selling on Amazon FBA must first determine whether their business activities constitute being engaged in a U.S. Trade or Business (USTOB) and whether that trade or business generates Effectively Connected Income (ECI). If both conditions are met, the seller will be subject to U.S. taxation at graduated rates.

Key Factors for USTOB:

  • Considerable, Continuous, and Regular Activities: Storing inventory in U.S. warehouses (Amazon FBA), fulfilling orders from the U.S., or using U.S. logistics services may create USTOB.
  • Physical Presence: Having a U.S. office, employees, or dependent agents significantly increases the likelihood of being classified as engaged in a USTOB.
  • Effectively Connected Income (ECI): If you have USTOB, the income that arises from these activities will be classified as ECI and taxed at U.S. federal income tax rates (10%-37% for individuals, 21% for corporations).

Key Takeaway: If you store inventory in the U.S. (Amazon FBA), you likely have USTOB and ECI, making your income subject to U.S. taxation.

2. Permanent Establishment (PE) Considerations for Foreign Entities

For foreign corporations selling on Amazon, the next step is determining whether U.S. activities create a Permanent Establishment (PE). Under U.S. tax law, a PE exists when a foreign entity has a fixed place of business in the U.S. or a dependent agent who regularly concludes contracts on its behalf. If a PE exists, the foreign corporation must pay U.S. tax on all income attributable to the PE.

Key Considerations for Foreign Entities:

  • Fixed Place of Business: Leasing a U.S. warehouse, office, or storefront generally creates a PE.
  • Dependent Agents: A U.S.-based representative with authority to negotiate or conclude contracts may also establish a PE.

Key Takeaway: If a foreign company has a U.S. office, employees, or an agent concluding contracts in the U.S., it likely has a PE and must file Form 1120-F and pay U.S. tax on its U.S.-sourced income.

3. U.S. Taxation for a Non-Resident with a Disregarded U.S. SMLLC

For non-residents selling through a U.S. Single-Member LLC (SMLLC) disregarded for tax purposes, all U.S. income is passed directly to the owner. If the LLC’s activities constitute USTOB and generate ECI, the owner is personally liable for U.S. taxes on the LLC’s income.

Filing Requirements for Non-Resident LLC Owners:

  • Form 1040-NR → Required to report ECI and claim deductions.
  • Form 5472 → Required to report transactions between the LLC and its foreign owner.
  • Form W-7 → Required to obtain an ITIN if needed for tax filing.

Key Takeaway: If a foreign-owned U.S. SMLLC has USTOB and ECI, the owner must file Form 1040-NR and pay U.S. taxes.

4. Why Form 8833 is Likely Not Required with Form 1040-NR

Form 8833 is generally NOT required for Amazon FBA sellers filing Form 1040-NR.

  • Form 8833 is used to claim treaty benefits (such as an exemption from U.S. tax), but if your country does not have a tax treaty with the U.S., there are no treaty benefits to claim.
  • If you are reporting ECI on Form 1040-NR, a treaty position is generally not required because ECI is already subject to regular U.S. taxation.
  • If you receive FDAP income (e.g., royalties, interest, dividends) and claim a tax treaty benefit to reduce withholding tax, then Form 8833 may be required—but this does NOT apply in the absence of a tax treaty.
  • Without a tax treaty, FDAP income is subject to a flat 30% withholding tax, and Form 8833 does NOT apply.

Key Takeaway: If your country has no tax treaty, you CANNOT use Form 8833 to reduce or eliminate U.S. tax.

5. The Impact of Having No U.S. Tax Treaty

The absence of a U.S. tax treaty increases U.S. tax liability and compliance burdens for foreign sellers.

  • No treaty benefits to exempt or reduce U.S. tax.
  • U.S. tax exposure is based entirely on USTOB and ECI classification.
  • Possible withholding taxes on passive income.

Key Implications:

  • Withholding Tax: Fixed, Determinable, Annual, Periodical (FDAP) income (e.g., royalties, interest) is subject to a 30% withholding tax unless reduced by a tax treaty.
  • Branch Profits Tax: Foreign corporations with a PE in the U.S. may be subject to an additional 30% branch profits tax.

Key Takeaway: Without a tax treaty, a non-resident selling on Amazon FBA has NO treaty-based protections and must pay full U.S. tax on U.S.-sourced income.

6. Foreign Tax Credits to Avoid Double Taxation

Even without a tax treaty, non-residents may claim a Foreign Tax Credit (FTC) in their home country to prevent double taxation.

  • If you pay U.S. tax on ECI, you may claim a Foreign Tax Credit (FTC) on your home country’s tax return.
  • The FTC is limited to the amount of tax payable in your home country on the same income.
  • Some countries provide unilateral relief (i.e., foreign tax credits) for taxes paid to the U.S., even in the absence of a treaty.
  • Form 1116 (Foreign Tax Credit) must be filed with Form 1040-NR to claim this credit.

Key Takeaway: Without a tax treaty, FTCs may be the only way to reduce double taxation, but eligibility depends on the home country’s tax rules.

Conclusion

If you are a non-resident selling through Amazon FBA and your country does NOT have a U.S. tax treaty, you must carefully evaluate whether your activities create USTOB, ECI, or PE. Failing to do so could result in significant U.S. tax liabilities without the benefit of treaty protections.

Key Takeaways:

  • USTOB & ECI classification determines U.S. tax liability—not tax treaties.
  • Without a tax treaty, Form 8833 is NOT required or applicable.
  • A foreign corporation MAY be subject to a 30% branch profits tax if it has a PE in the U.S.
  • FDAP income is subject to a 30% withholding tax unless otherwise reduced by local tax laws.
  • Foreign Tax Credits (FTC) may help reduce double taxation, but eligibility depends on the home country’s rules.

Final Thought: If your country does NOT have a U.S. tax treaty, you should assume full U.S. tax liability if you have USTOB and ECI. Consult a tax professional to ensure compliance and to determine if you can claim a Foreign Tax Credit in your home country—the list of countries with tax treaties. 

Does Selling on Amazon as a Foreign Entity Create a Permanent Establishment?

For a foreign corporation selling on Amazon in the U.S., the branch profits tax applies only if both a Permanent Establishment (PE) and U.S.-sourced income are present. The branch profits tax, a specific U.S. tax on foreign corporations, is triggered when the foreign corporation has a PE and is subject to U.S. corporate income tax.

1. What is a Permanent Establishment (PE)?

A PE is a taxable presence in the U.S., determined by having a fixed place of business or a dependent agent authorized to conclude contracts on the company’s behalf. However, if the foreign entity has no PE in the U.S., it is not subject to U.S. corporate tax or branch profits tax.

  • Key Factors for PE:
    • Fixed Place of Business: A U.S. office, warehouse, or other fixed location used for business activities could create a PE.
    • Dependent Agent: A U.S.-based agent with authority to conclude contracts on the company’s behalf could also create a PE.

2. Branch vs. U.S. Corporation

A branch, while similar to a PE, is not the same. A U.S. corporation is a separate legal entity and is not treated as a branch. Thus, a foreign entity with a U.S. corporation does not create a branch profits tax liability. Additionally, if the foreign corporation forms a U.S. LLC taxed as a corporation, it does not create branch profits tax either, since a U.S. corporation (or LLC taxed as one) is treated as a U.S. taxpayer, not a foreign branch.

  • Key Considerations:
    • U.S. Corporation: A U.S. corporation is treated as a domestic taxpayer and is not subject to branch profits tax.
    • U.S. LLC Taxed as a Corporation: A U.S. LLC that elects to be taxed as a corporation is also treated as a domestic taxpayer and is not subject to branch profits tax.

3. Branch Profits Tax

In short, a foreign corporation needs both a PE and U.S.-sourced income to be subject to branch profits tax, and treaties may reduce the tax rate. Without both or if the entity is structured differently (e.g., as a U.S. corporation), branch profits tax does not apply.

  • Key Implications:
    • Branch Profits Tax Rate: The branch profits tax rate is 30%, but it may be reduced or eliminated under a tax treaty.
    • No PE or U.S.-Sourced Income: If the foreign corporation has no PE or U.S.-sourced income, it is not subject to branch profits tax.

4. What Creates a Permanent Establishment (PE)?

The following items can create a Permanent Establishment (PE) for a foreign entity in the U.S., depending on the facts and circumstances:

  • 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

When a foreign seller establishes a U.S. entity required to pay taxes, that entity is treated as a domestic taxpayer. It is subject to U.S. federal income tax on its worldwide income. However, the establishment of a U.S. entity does not automatically create a Permanent Establishment (PE) for the foreign seller, as the U.S. entity is a separate legal entity.

1. Common U.S. Entity Structures

The most common U.S. entities for foreign sellers are:

  • U.S. Corporation:
    • A U.S. corporation is treated as a domestic taxpayer and is subject to U.S. federal income tax on its worldwide income at a flat rate of 21%.
  • LLC Taxed as a Corporation:
    • A U.S. LLC can elect to be taxed as a corporation by filing Form 8832 (Entity Classification Election) with the IRS.
    • Once elected, the LLC is treated as a domestic taxpayer and is subject to U.S. federal income tax at a flat rate of 21%.

2. Filing Requirements

In both situations, the U.S. entity must file the following forms:

  1. Form 1120:
    • The U.S. corporation or LLC taxed as a corporation must file Form 1120 (U.S. Corporation Income Tax Return) to report its income, deductions, and tax liability.
  2. Form 5472:
    • If the U.S. entity is owned by a foreign person or entity, it must also file Form 5472 (Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business) to report transactions with its foreign owner.

3. Transfer Pricing and Profit Shifting

Foreign sellers often establish a U.S. entity with the goal of lowering U.S. profits and paying less tax by moving profits to the foreign entity. However, these transactions must comply with U.S. transfer pricing rules, which require that transactions between related parties be conducted at arm’s length (i.e., as if the parties were unrelated).

  • Key Considerations:
    • Transfer Pricing Documentation: The U.S. entity must maintain documentation to support the arm’s length nature of its transactions with the foreign entity.
    • IRS Scrutiny: The IRS closely scrutinizes transfer pricing arrangements, and non-compliance can result in significant penalties and adjustments.

4. Permanent Establishment (PE)

The establishment of a U.S. entity does not automatically create a Permanent Establishment (PE) for the foreign seller, as the U.S. entity is a separate legal entity.

However, if the foreign seller conducts business in the U.S. outside of the U.S. entity (e.g., through a branch or dependent agent), it could create a PE, subjecting the foreign seller to U.S. tax on income attributable to the PE.

An LLC taxed as a partnership is a flow-through entity and a popular option for foreign sellers to create a “U.S. person” for platforms like Amazon (optional) and Walmart (required).

However, partnerships with foreign partners have specific withholding and filing requirements under Section 1446 of the Internal Revenue Code.

1. Withholding Tax Liability

The withholding tax liability of the partnership for its tax year is reported on Form 8804 (Annual Return for Partnership Withholding Tax).

A Form 8805 (Foreign Partner’s Information Statement) must be attached to Form 8804 for each foreign partner, whether or not any withholding tax was paid.

  • Key Considerations:
    • Form 8804: Reports the partnership’s total withholding tax liability for the year.
    • Form 8805: Provides each foreign partner with a statement of their share of the partnership’s income and withholding tax.

2. Filing Deadlines

  1. General Deadline:
    • File Form 8804 by the 15th day of the 4th month after the close of the partnership’s tax year.
    • Example: For a calendar-year partnership, the deadline is April 15.
  2. Extended Deadline for All Nonresident Alien Partners:
    • If the partnership is made up of all nonresident alien partners, it has until the 15th day of the 6th month after the close of the partnership’s tax year to file.
    • Example: For a calendar-year partnership, the deadline is June 15.
  3. Weekend or Holiday Deadline:
    • If a due date falls on a Saturday, Sunday, or legal holiday, file by the next business day.
  4. Extension Request:
    • If you need more time to file Form 8804, you may file Form 7004 (Application for Automatic Extension of Time to File Certain Business Income Tax, Information, and Other Returns) to request an extension.

3. Quarterly Withholding Tax Payments

The partnership must use Form 8813 (Partnership Withholding Tax Payment Voucher) to make quarterly withholding tax payments to the IRS. A Form 8813 must accompany each tax payment made during the partnership’s tax year.

  • Key Considerations:
    • Quarterly Payments: The partnership must make estimated tax payments throughout the year, even if no cash distributions are made to the partners.
    • Withholding Tax Rate: The withholding tax rate is 37% (or the highest applicable individual tax rate) on the foreign partner’s share of effectively connected income (ECI).

4. Withholding Tax Obligations

The partnership must pay the withholding tax regardless of:

  1. Foreign Partners’ Ultimate Tax Liability:
    • The withholding tax is based on the foreign partners’ share of ECI, regardless of their overall U.S. tax liability (which may be reduced by deductions, credits, or treaty benefits).
  2. Cash Distributions:
    • The partnership must pay the withholding tax even if it does not make any cash distributions to the partners during its tax year.

Determining whether a non-resident is engaged in a U.S. Trade or Business (USTOB) is not a simple yes-or-no question. The IRS and U.S. courts do not rely on a single factor but instead use a fact-intensive analysis to determine whether business activities rise to the level of USTOB.

Key Tests for USTOB Determination

For a foreign individual or entity to be considered engaged in a U.S. trade or business, the business activities must be:

  • Substantial – The activities must involve more than minor or isolated transactions.
  • Continuous – The business must operate on a regular and ongoing basis, not just sporadically.
  • Regular – The activities should not be one-time events but part of a recurring pattern of commercial transactions.

The IRS and courts will consider the totality of facts and circumstances, including:

  • Where business operations take place – Are key operational functions (such as inventory storage, fulfillment, or customer service) conducted within the U.S.?
  • How income is generated – Is revenue derived from U.S. customers through activities occurring in the U.S.?
  • Physical U.S. presence – Does the business own, lease, or store assets in the U.S., such as inventory in Amazon fulfillment centers or a rented office?
  • Services performed in the U.S. – Are employees, contractors, or agents performing business functions in the U.S., such as sales, contract negotiations, or marketing?

No Single Factor Determines USTOB

There is no bright-line test for USTOB classification. Instead, all business activities must be analyzed together to determine if they are sufficient to meet the IRS standard. A company that does not have a U.S. office or employees could still be considered engaged in a USTOB if its business activities in the U.S. meet the substantial, continuous, and regular threshold.

For example, a foreign seller using Amazon FBA may be engaged in a USTOB because the IRS Asset-Use Test confirms that U.S.-stored inventory is an asset used in a U.S. trade or business. Even though Amazon is an independent contractor, the seller’s continuous reliance on U.S.-based infrastructure to fulfill orders creates a strong business presence in the U.S.

On the other hand, a foreign business that merely ships goods to the U.S. without maintaining inventory or operating in the U.S. would not typically meet the USTOB threshold.

The Role of U.S. Physical Presence

While having a U.S. office, warehouse, or employees generally solidifies a USTOB determination, physical presence is not required to be classified as USTOB. The IRS and courts have ruled that businesses with ongoing U.S.-based commercial activity, such as warehousing or fulfillment, may still qualify as a USTOB even if they have no formal office or direct employees in the U.S.

Impact of Being Classified as USTOB

If a non-resident is determined to be engaged in a USTOB, their U.S.-sourced income is typically classified as Effectively Connected Income (ECI) and subject to U.S. federal taxation at graduated rates. A USTOB classification requires filing Form 1040-NR (for individuals) or Form 1120-F (for foreign corporations) to report U.S. income and claim any available deductions.

Foreign corporations that are uncertain about their USTOB status may consider filing a protective Form 1120-F to preserve the ability to claim deductions and limit future IRS audit risks.

Key Takeaways

  • Engaging in a U.S. Trade or Business (USTOB) is determined based on a combination of factors, including business operations, income sources, and physical presence in the U.S.
  • The IRS Asset-Use Test confirms that storing inventory in the U.S. (such as Amazon FBA) may be sufficient to meet the USTOB standard.
  • Physical presence is not required—businesses can be engaged in a USTOB even without a U.S. office or employees.
  • Once classified as USTOB, income from U.S. activities is considered Effectively Connected Income (ECI) and subject to U.S. taxation.
  • Foreign entities that are uncertain about their USTOB classification should consult a tax professional and consider filing a protective Form 1120-F.

Understanding whether your business is engaged in a U.S. trade or business is critical for tax compliance. If you are unsure whether your activities meet the USTOB threshold, consult with a tax attorney to ensure proper reporting and avoid potential IRS penalties.

Many tax preparers mistakenly assume that forming a U.S. single-member LLC (SMLLC) or opening a U.S. bank account automatically means the non-resident owner is engaged in a U.S. trade or business (USTOB).

However, this is not always the case. The mere existence of a U.S. LLC or domestic accounts does not, by itself, establish USTOB. For instance, selling on platforms like Amazon with inventory stored in the U.S. does not necessarily create USTOB unless other factors, such as regular and substantial business operations in the U.S., are present.

A comprehensive analysis of all business activities, including where services are performed and the type of U.S. presence, is necessary before concluding U.S. tax obligations.

Misinterpretations often lead to unnecessary filings and tax payments when no USTOB or effectively connected income (ECI) exists.

Hybrid Entities

From a U.S. tax perspective, a hybrid entity is treated as fiscally transparent (such as a disregarded entity or partnership) for U.S. tax purposes but is treated as a corporation in another jurisdiction. For example, a U.S. LLC might be disregarded for U.S. tax purposes but treated as a corporation in a foreign country. In these cases, treaty benefits might not apply because the entity classifications between countries don’t align, and the foreign country may treat income differently than the U.S. does.

Foreign Dividend Treatment:

Some countries treat income from a U.S. LLC (even if disregarded in the U.S.) as dividends from a U.S. corporation. In contrast, others may offer favorable tax treatment for foreign dividends, making them non-taxable under certain conditions.

Reverse Hybrid Entities:

A reverse hybrid entity operates oppositely, being treated as a flow-through for tax purposes in a foreign country. Still, as a corporation in the U.S., this can result in unique tax challenges, as the entity is classified differently in each jurisdiction, impacting tax treaties and tax obligations.

Key Consideration:

Your home country’s accountant needs to evaluate how money received from a U.S. entity will be taxed in your home country. The interaction between U.S. and foreign tax laws, particularly with hybrid entities, can lead to complexities, including transfer pricing, treaty benefits, and dividend taxation issues.

For further compliance, always ensure that your international structure is reviewed thoroughly, particularly with respect to anti-hybrid regulations and transfer pricing rules, which are becoming more strictly enforced globally.

This analysis should give you a clear view of the complexities of hybrid and reverse hybrid entities and how foreign dividends may be treated differently depending on the jurisdiction.

Branch Profits

The branch profits tax (BPT) under Section 884(a) was introduced as part of the Tax Reform Act of 1986. It is designed to mirror the tax treatment of dividends paid by a U.S. subsidiary to its foreign parent. Instead of dividend distributions, the branch profits tax is imposed on the effectively connected income (ECI) of a U.S. branch of a foreign corporation when earnings are repatriated or deemed repatriated to the foreign parent company. The tax rate for branch profits is generally 30%, though it may be reduced or eliminated under certain tax treaties between the U.S. and the foreign corporation’s home country.

Key Clarification:

For the branch profits tax to apply, the foreign corporation must have a permanent establishment (PE) in the U.S., which is generally defined by tax treaties. A PE usually requires a fixed place of business in the U.S., such as renting an office or hiring dependent agents who can conclude contracts or perform key business functions on behalf of the foreign corporation. Dependent agents are individuals or entities controlled by the foreign corporation, such as a salesperson or representative, whose actions bind the foreign company.

Most foreign e-commerce sellers, such as those selling on Amazon or Walmart, typically do not have a PE in the U.S. because they lack a fixed place of business or dependent agents operating in the U.S., meaning that the branch profits tax generally wouldn’t apply to them.

Distinguishing Branch Profits Tax from Dividend Withholding Tax:

If a foreign corporation owns a U.S. subsidiary, such as a U.S. corporation, this does not trigger the branch profits tax. Instead, the foreign corporation would face dividend withholding taxes, typically 30% (often reduced by tax treaties), when profits are distributed from the U.S. corporation to the foreign parent. This dividend withholding tax only applies when profits are distributed as dividends, unlike the branch profits tax, which applies to ECI when it is repatriated or deemed repatriated from a U.S. branch.

What is the branch profits tax rate?

The branch profits tax rate is typically 30% unless reduced or exempted by an applicable tax treaty. This tax is imposed on the after-tax effectively connected earnings and profits (E&P) of a foreign corporation’s U.S. trade or business.

The branch profits tax applies when these earnings are deemed to be distributed by the U.S. branch to the foreign parent company, mimicking the tax treatment of dividends distributed by a U.S. subsidiary to its foreign parent.

Reduction with a U.S. Tax Treaty

Many tax treaties between the U.S. and other countries include provisions that reduce the branch profits tax rate, which can vary from one treaty to another. In some treaties, the rate may be reduced to 5%, but this is not universal. The applicable rate depends on the specific tax treaty provisions for each country.

Therefore, it is important to consult the specific tax treaty between the U.S. and the foreign country to determine the exact branch profits tax rate reduction. The IRS tax treaty table can be a helpful resource for identifying potential tax treaty benefits for branch profits tax reductions.

Hiring a U.S Tax Attorney

Hiring a U.S. Tax Attorney to Support Your Position

If you’re from a country without a U.S. tax treaty, like Hong Kong, and you’re deemed engaged in a U.S. trade or business (USTOB), your company will be subject to U.S. taxes, similar to how a permanent establishment would be treated.

However, with the right legal defense, you might argue that your Amazon FBA activities don’t meet the threshold for USTOB if they aren’t considerable, continuous, or regular. A knowledgeable U.S. tax attorney can support this position and defend you if challenged by the IRS. While the legal fees may be significant, this investment could be worthwhile for companies with high profits and no tax treaty protection.

Hiring a U.S Tax Attorney

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.

Sales Tax Compliance

Sales Tax Compliance

Navigate the U.S. Tax Complexities with Expert Guidance: Understanding your obligations is crucial in the ever-changing landscape of U.S. taxation for e-commerce. The sales tax terrain has been revolutionized since the landmark 2018 Supreme Court ruling in Wayfair vs. South Dakota. Now, 47 states have new economic nexus standards, freeing most marketplace sellers like you from having to register for sales tax. But nuances exist, and we’re here to decode them for you.

For example, Illinois’ audit division clarifies that just having your inventory in an Amazon FBA warehouse doesn’t warrant registration—Amazon’s got your tax obligations covered. Regarding corporate income tax, seeking a legally binding statement is advisable.

Shifting gears to non-marketplace sales? Platforms like Shopify bring different challenges. If you’ve been selling for years and are overdue on sales tax, we can conduct a nexus study to evaluate your liability and recommend the next steps—voluntary disclosure or strategic registration.

Why NCP? We collaborate with top sales tax software providers and specialized firms to offer you an unmatched blend of expertise and real-time insights. Navigating sales tax has never been easier if you’re eyeing the booming U.S. marketplace. Partner with NCP and make your U.S. e-commerce dream a streamlined reality.

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

At NCP, we provide essential training and guidance before you form your U.S. entity. As part of our new client onboarding, we will introduce you to experienced tax professionals who can assist with your tax needs. Please note that their services are independent of NCP, and their fees are separate. We are confident they have the expertise to help you navigate U.S. tax regulations effectively.

Tax Professionals Required

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.