U.S. Tax Responsibilities for Non-Resident E-Commerce Sellers
Clarify your U.S. tax obligations
Clarify your U.S. tax obligations
Your U.S. tax responsibilities will come into play, whether you are a foreign company doing business in the U.S. or a single-member LLC in the U.S. owned by your foreign company. Keep in mind; Amazon will not allow you to change your legal business to a U.S. company unless you update the tax interview and legal entity properly and a single-member LLC disregarded will NOT show up as the business name on your seller profile page.
There are three levels to consider. This is a complex subject that requires consulting with a tax professional(s):If your company sells on Amazon.com but ships products from outside the U.S. into the U.S. with no U.S. employees, office, or dependent agents, this generally does not constitute being engaged in a U.S. trade or business (USTOB).
However, even if you’re 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 Tax Cuts and Jobs Act (TCJA) of 2017 clarified and expanded the rules for determining whether income from inventory sales is sourced to the U.S. Before the TCJA, the title passage rule was a key factor in sourcing inventory income (i.e., where the ownership of goods transferred). After 2017, the place of sale rule became critical, shifting focus to where the customer takes possession of the goods.
For inventory produced in one location and sold in another, income may now be sourced proportionally between the place of production and the place of sale.
This change means that sales to U.S. customers are generally considered U.S.-sourced income, regardless of where the inventory is shipped from.
A U.S. single-member LLC (SMLLC) is treated as a disregarded entity for U.S. tax purposes. If the LLC is foreign-owned, you must file Form 5472 and a pro forma Form 1120 annually, even if no federal taxes are due.
While no federal taxes are typically due for a disregarded entity, state sales and income tax rules could still apply based on your business activities, such as storing inventory in Amazon FBA warehouses.
Additionally, if you are considering changing the legal entity on your Amazon account, be cautious, as a single-member LLC will not allow you to update your legal name when your account is already established.
The recent Tax Court case, YA Global v. Commissioner (161 TC No. 11, January 2024), underscores how foreign entities can be deemed engaged in a U.S. trade or business. In this case, the Court ruled that the activities of a U.S.-based fund manager were attributed to the foreign partnership (YA Global Investments, LP), leading to the partnership being classified as engaged in a USTOB. Here are the critical takeaways:
While the YA Global case involves a complex investment fund, it provides important insights into how activities conducted in the U.S. can trigger USTOB classification. Amazon sellers with U.S. inventory or operations involving U.S.-based agents should:
By addressing potential USTOB issues proactively, Amazon sellers can better manage their U.S. tax obligations and protect their businesses from unexpected liabilities.
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.
Foreign entities selling on Amazon.com may face unique challenges when determining whether to file a protective U.S. federal return, such as Form 1120-F, especially if they do not have a U.S. Employer Identification Number (EIN). Here are key considerations:
A protective return may be necessary when:
If a foreign entity establishes a U.S. office, such as to qualify for Shopify Payments, this could create a Permanent Establishment (PE) for tax purposes. A PE designation goes beyond the need to file a protective return; it requires filing a full U.S. tax return and potentially paying U.S. taxes on income effectively connected to the U.S. activities. Foreign entities should be aware of this significant shift in obligations and consult tax professionals to fully understand the implications.
Filing a protective Form 1120-F preserves the right to claim deductions against gross income if the IRS later determines that a USTOB classification applies. Without such a filing, foreign entities could lose the ability to deduct normal business expenses, resulting in higher taxable income. This step is particularly important for entities operating on the fringes of USTOB definitions, as it mitigates downside risks and ensures compliance.
However, filing a protective return may prompt closer scrutiny by the IRS. Given the IRS’s active “Form 1120-F Non-Filer Campaign,” foreign companies should weigh the benefits of filing against the potential risks of drawing attention to their operations. In most cases, the ability to preserve deductions outweighs the risks, especially for businesses with complex U.S. connections.
If a foreign entity does not have a U.S. EIN, it may:
Foreign sellers on Amazon.com should:
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.
However, sellers with minimal U.S. presence or no U.S. EIN must carefully evaluate whether filing is necessary and the risks of not doing so. If a U.S. office is established, foreign entities must be prepared to file a full U.S. tax return and pay taxes on effectively connected income.
By proactively addressing these issues, foreign sellers can maintain smooth operations and protect their business from IRS scrutiny.
If you are a non-resident selling on Amazon via FBA, either through 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 evaluate several critical tax factors to determine your U.S. tax obligations.
As a foreign entity or the owner of a disregarded U.S. SMLLC, the first step is to determine whether your activities constitute being engaged in a U.S. trade or business (USTOB) and whether that trade or business generates Effectively Connected Income (ECI), which would make your income subject to U.S. taxation.
If you’re operating as a foreign entity, assess whether your U.S. activities create a Permanent Establishment (PE) under U.S. tax law. A PE is triggered when there is a fixed place of business (such as a U.S. warehouse or office) or a dependent agent who regularly concludes contracts on your behalf in the U.S. If a PE exists, the foreign entity becomes subject to U.S. tax on income that is attributable to the PE.
For non-residents with a disregarded U.S. SMLLC, the LLC’s income flows directly to the owner. If your LLC’s activities in the U.S. are determined to constitute a USTOB and generate ECI, you as the owner may be directly liable for U.S. taxes on the LLC’s income, even without a tax treaty in place.
The absence of a tax treaty between your home country and the U.S. means that there are no treaty benefits to reduce or eliminate U.S. tax liability. This could result in full U.S. tax exposure on your U.S.-sourced income, including possible withholding taxes and additional taxes like the branch profits tax for foreign corporations with a PE in the U.S.
While you may still be eligible to claim foreign tax credits in your home country for taxes paid in the U.S., the lack of a tax treaty increases the risk of double taxation. Typically, tax treaties include provisions that prevent or reduce the impact of double taxation, but in their absence, careful planning is required to mitigate tax burdens in both the U.S. and your home country.
If you are a non-resident selling through Amazon FBA and are from a country without a U.S. tax treaty, you must carefully evaluate whether your activities create U.S. tax obligations due to USTOB, ECI, or a PE. Failing to do so could result in significant tax liabilities without the benefit of treaty protections. We recommend you consult with two different U.S. tax attorneys who are on the same page about your situation and risks.
For a list of countries with a U.S. tax treaty, visit the IRS website.
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.
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.
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.
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.
The following items can create a Permanent Establishment (PE) for a foreign entity in the U.S., depending on the facts and circumstances:
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.
The most common U.S. entities for foreign sellers are:
In both situations, the U.S. entity must file the following forms:
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).
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.
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.
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.
The partnership must pay the withholding tax regardless of:
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 courts rely on a set of factors, looking at the overall facts and circumstances, including both the entity and the owner’s activities.
For an activity to qualify as USTOB, it must be substantial, continuous, and regular, with the primary goal of generating income or profit. Key considerations include where services are performed, where income is generated, and how the business operates in relation to U.S. customers or clients.
No single factor is determinative, and it’s important to assess all elements together, including the location of assets, the nature of business transactions, and the presence of any physical U.S. presence, like inventory storage or office space.
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.
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.
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.
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.
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.
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.
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.
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 support you in navigating U.S. tax regulations effectively.
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.