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

Foreign Entity Selling into the U.S. or a U.S. LLC Owned by a Foreign Entity

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):
Your company has no connections to any U.S. suppliers, with no U.S. employees, services , assets, or offices.
Your company uses U.S. suppliers or logistics services, such as Amazon FBA, but has no U.S. employees or office. In this case, you may be deemed 'engaged in a U.S. trade or business (USTOB)', and your income may be classified as Effectively Connected Income (ECI). While this could result in U.S. taxes, the U.S. tax treaty with your home country may reduce or eliminate your U.S. tax liability. However, you will still need to comply with additional filing requirements, including Form 1040-NR and Form 8833, to report your income and claim treaty benefits. Required Filings for a Foreign-Owned SM LLC DE - Form 5472 and a pro forma Form 1120: These are standard filings for all foreign-owned single-member LLCs to report related-party transactions. Additional Filings if USTOB and ECI Apply If USTOB and ECI are determined (SM LLC DE owned by a non-resident individual): - Form 1040-NR: Required to report ECI, even if no taxes are owed after deductions. - Form W-7: To obtain an ITIN for filing purposes, if needed. - Form 8833: If you are from a treaty country, this discloses your treaty position to potentially avoid U.S. taxes under treaty provisions. - Avoiding Unintended USTOB Classification Be cautious of creating unintended USTOB by meeting certain payment platform or bank requirements, such as providing a physical address, lease agreement, or utility bill. These steps, while necessary for compliance with platforms like Shopify or Stripe, may signal a more substantial U.S. presence and trigger additional filing obligations.
The presence of a U.S. office or employees in connection with a U.S. LLC establishes a clear U.S. trade or business (USTOB) under U.S. domestic tax rules. This generally means that the income generated by the LLC will be classified as effectively connected income (ECI) and will be subject to U.S. federal income tax at graduated rates. Tax treaty benefits may apply in certain circumstances, but they typically do not eliminate U.S. tax liability for income attributable to a USTOB and ECI. If the LLC owner is from a treaty country, the treaty may reduce or eliminate U.S. tax liability on business profits unless the owner has a fixed base (for individuals) or the LLC has a permanent establishment (PE) (for companies) in the U.S. However, if a fixed base or PE exists, the treaty will not provide relief, and the income will be subject to U.S. tax. Double taxation can often be avoided through the application of foreign tax credits in the owner’s home country. For owners from non-treaty countries, U.S. taxes paid are generally final, with relief dependent on whether the home country unilaterally provides foreign tax credits. The presence of a U.S. office or employees firmly establishes a business nexus within the U.S., resulting in additional tax return obligations (federal, state, and payroll) and definitive U.S. tax liability.

Engaged in a U.S. Trade or Business

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.

Recent Court Case Highlights: Foreign Partnership and USTOB

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:

  • Agency Relationship: The Court found that the U.S. fund manager acted as an agent for the partnership, performing continuous and regular activities aimed at producing income. These activities were attributed to the partnership.
  • Dealer in Securities: The partnership was classified as a ‘dealer in securities’ under Section 475, requiring it to mark securities to market and recognize ordinary income or loss annually.
  • Source of Income: Gains from the sale of discounted stock were deemed U.S.-sourced income, attributed to the U.S. office of the fund manager.
  • Withholding Obligations: The partnership was required to withhold taxes on the foreign partner’s share of effectively connected income (ECI) and was penalized for failing to file Form 8804 to report withholding tax.
  • Statute of Limitations: The failure to file Form 8804 prevented the statute of limitations from starting, leaving the partnership open to indefinite IRS assessments.

Why This Matters for Amazon Sellers

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:

  • Review their business activities to ensure compliance with U.S. tax rules.
  • Understand how sourcing rules under the TCJA may apply to their income.
  • File required forms, such as Form 5472 or protective returns, to start the statute of limitations and minimize penalties.

By addressing potential USTOB issues proactively, Amazon sellers can better manage their U.S. tax obligations and protect their businesses from unexpected liabilities.

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 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:

When Should a Foreign Entity File a Protective Return?

A protective return may be necessary when:

  1. Threshold Activities Exist:
    • Your activities in the U.S. may approach the threshold of being classified as engaged in a U.S. Trade or Business (USTOB). Examples include:
      • Using U.S. warehouses for inventory (e.g., Amazon FBA).
      • Engaging with U.S.-based agents for customer fulfillment.
    • Even if you do not have a dependent agent in the U.S., the continuous and regular nature of your business activities could still create a USTOB.
  2. Uncertainty About ECI:
    • You are uncertain whether your income constitutes Effectively Connected Income (ECI) with a USTOB.
    • Filing a protective return allows you to report income and claim deductions, preserving your ability to reduce taxable income if the IRS later determines that a USTOB exists.
  3. Statute of Limitations:
    • Filing a protective return can start the statute of limitations, limiting IRS audit risks and potential penalties.
    • Without a protective return, the IRS may have an indefinite period to assess taxes, penalties, and interest.

Impact of a U.S. Office

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.

Practical Implications of Filing Protective Form 1120-F

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.

What Happens Without a U.S. EIN?

If a foreign entity does not have a U.S. EIN, it may:

  1. Avoid Filing Requirements:
    • Avoid filing certain U.S. tax forms, such as Form 1120-F, but this does not eliminate the potential for future liabilities if the IRS determines U.S. tax obligations exist.
  2. Face Compliance Challenges:
    • If the IRS later deems the entity engaged in a USTOB, the lack of an EIN and failure to file could complicate compliance and result in penalties.
  3. Miss Deductions:
    • Without a protective return, the foreign entity may lose the ability to claim deductions against gross income, leading to higher taxable income.

Practical Steps for Amazon Sellers

Foreign sellers on Amazon.com should:

  1. Evaluate Business Activities:
    • Determine if your use of U.S. fulfillment centers, warehousing, or agents crosses into USTOB territory.
    • Consider whether your activities are considerable, continuous, and regular, which could indicate a USTOB.
  2. Obtain a U.S. EIN:
    • Even if a protective return is not immediately required, having an EIN simplifies compliance if your activities expand.
  3. Consult a Tax Professional:
    • Seek guidance to assess the necessity of filing a protective return based on your business model and risk factors.

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.

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.

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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, 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.

1. Evaluate Engaged in U.S. Trade or Business (USTOB)

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.

  • Key Factors for USTOB:
    • Considerable, Continuous, and Regular Activities: Storing inventory in U.S. warehouses (e.g., Amazon FBA) or using U.S. suppliers or logistics services may create a USTOB.
    • Physical Presence: Having a U.S. office, employees, or dependent agents could also establish a USTOB.
  • ECI: Income effectively connected to a USTOB is subject to U.S. federal income tax at graduated rates (10%-37% for individuals, 21% for corporations).

2. Permanent Establishment (PE) for Foreign Entities

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.

  • Key Considerations:
    • Fixed Place of Business: A U.S. warehouse or office used for business activities could create a PE.
    • Dependent Agents: A U.S.-based agent with authority to conclude contracts on your behalf could also create a PE.

3. Disregarded SMLLC and U.S. Taxation

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.

  • Filing Requirements:
    • Form 1040-NR: To report ECI and claim deductions.
    • Form 8833: To disclose treaty positions (if applicable).
    • Form 5472: To report transactions between the LLC and its foreign owner.

4. Impact of No U.S. Tax Treaty

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.

  • Key Implications:
    • Withholding Tax: FDAP income (e.g., royalties, interest) is subject to 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 branch profits tax of 30%.

5. Foreign Tax Credits

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.

  • Key Considerations:
    • Foreign Tax Credit Limitations: The credit is typically limited to the amount of tax payable in your home country on the same income.
    • Unilateral Relief: Some countries provide unilateral relief (e.g., foreign tax credits) for taxes paid to the U.S., even without a tax treaty.

Conclusion

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 USTOBECI, 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.

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)?

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

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).

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 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.

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 support you in navigating 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.