Federal income tax: the four scenarios
| Scenario | US federal tax owed | Forms required |
|---|---|---|
| No ECI, no US-source income (most digital businesses) | $0 | Form 5472 + pro forma 1120 |
| No ECI, some US-source FDAP (dividends, royalties, interest) | 30% withholding (often reduced by treaty) | Form 5472 + 1120 + W-8BEN-E |
| ECI exists (US employees, US office, fixed place of business) | Graduated US tax rates on net ECI | Form 5472 + 1120 + 1040-NR |
| FDAP withheld at source (payer withholds 30% or treaty rate) | Withholding satisfies tax | Form 5472 + 1120 + W-8BEN-E |
What is ECI? (deep dive)
Effectively Connected Income is income effectively connected to a US trade or business under Internal Revenue Code Section 864(c). The IRS applies a fact-specific test. Indicators of ECI:
- Physical office or fixed place of business in the US
- US-based employees
- Dependent agents acting on your behalf in the US (not independent contractors)
- Substantial US-based equipment or inventory used in operations
- Personal services physically performed within the US
- Regular continuous economic activity in the US
Most non-resident digital business owners (SaaS, dropshipping, freelance, content creation) do not meet ECI factors. Amazon FBA is the most common grey area because of US warehouse inventory. The conventional position is that Amazon acts as an independent contractor handling logistics, you have no US office or employees, so FBA inventory alone does not rise to ECI. Tax Court cases including Piedras Negras Broadcasting and Pinchot v. Commissioner support the view that mere US-based inventory does not by itself create ECI. Consult a US CPA familiar with FBA before relying on this analysis.
FDAP withholding (US-source passive income)
Fixed, Determinable, Annual, or Periodical (FDAP) income is US-source passive income subject to 30% default withholding by the US payer under Internal Revenue Code Section 1441:
- Dividends from US corporations
- Royalties from US licensees
- Rent from US real estate
- Interest on certain US securities
- Annuities, certain pension payments
- Some forms of services income
Most operating non-resident LLCs do not receive significant FDAP. If you do, Form W-8BEN-E lets you claim treaty benefits. The US has treaties with about 70 countries; treaty rates often reduce the withholding from 30% to 0% to 15%. The form is filed with the US payer, not with the IRS directly.
Stripe, Amazon, Upwork, Patreon, YouTube, and most US payers accept Form W-8BEN-E and apply treaty rates automatically once received.
State and local tax (multi-state nexus)
Wyoming has no state income tax. But if your business has nexus in other states, that state may tax you.
- FBA inventory nexus: Amazon US warehouses in CA, TX, NY, FL, OH, IL, AZ, NV, NJ, GA, PA create physical nexus. You may owe sales tax and (rarely) state income tax in those states.
- Economic nexus (post-Wayfair): most states impose sales tax registration once you exceed $100,000 in sales or 200 transactions to customers in that state (South Dakota v. Wayfair, 2018).
- Property tax: only if you own US real estate.
- State income tax: depends on the state. Most states do not tax non-resident pass-through income from sources outside the state. Some (California) are more aggressive.
- Franchise tax: Delaware ($300/year min), California ($800/year min), Texas (revenue-based). Wyoming has $0 franchise tax.
TaxJar, Avalara, and A2X automate multi-state sales tax compliance. Most early-stage founders only register in 1 to 3 states.
Home country tax (by major market)
- India: LLC income reported as foreign company income on your ITR under Income Tax Act 1961 Section 5. India taxes worldwide income for resident Indians. Schedule FA disclosure of foreign assets required. US-India tax treaty Article 7 (Business Profits) generally exempts non-ECI from US tax for Indian residents.
- Pakistan: Worldwide income for residents under Income Tax Ordinance 2001 Section 11. Foreign assets reported on Wealth Statement. US-Pakistan tax treaty (1959) is in force.
- Bangladesh: Worldwide income for resident Bangladeshis under Income Tax Act 2023. NBR foreign asset disclosure may apply.
- UAE: UAE has no personal income tax (Federal Decree-Law No. 8 of 2017 imposes corporate tax only). UAE residents owning US LLCs typically owe no UAE tax on LLC income.
- UK: UK resident-domiciled taxpayers pay UK tax on LLC pass-through income under ITA 2007. Non-dom remittance basis may apply.
- Brazil: Worldwide income for Brazilian residents under Lei 12.973/14. RFB foreign asset disclosure required.
- Singapore: Foreign-sourced income generally not taxed unless received in Singapore (territorial system under Income Tax Act).
- Australia / Canada: Worldwide income. CFC rules may apply (Controlled Foreign Corporation rules), though LLCs are treated as look-through entities in most cases.
- Philippines: Worldwide income for resident citizens; territorial for non-resident citizens. Disclosure of foreign assets required.
- Indonesia: Worldwide income under Indonesia Tax Code. Foreign asset disclosure required.
- Nigeria: Worldwide income for residents under CITA. FRA disclosure of foreign assets may apply.
Tax treaty benefits and Form W-8BEN-E
The US has tax treaties with about 70 countries. Treaties typically address:
- Reduced US withholding on FDAP (dividends, royalties, interest, rent)
- Credit for US tax paid against home-country liability
- Avoidance of double taxation on the same income
- Mutual assistance in tax matters (information exchange)
- Permanent establishment definitions
Form W-8BEN-E is the form non-US entities use to claim treaty benefits with US payers. Filed with the payer (Stripe, Amazon, Upwork), not with the IRS directly.
Common treaty rates by country (US-source FDAP):
- UK: 0% on most FDAP
- India: 15% on dividends, 10-15% on royalties, 15% on interest
- Germany: 0-5% on dividends, 0% on royalties, 0% on interest
- Pakistan: 15% on dividends, varying on other categories
- Bangladesh: rates per US-Bangladesh treaty
- Brazil: no comprehensive treaty (limited reduction)
- UAE: no comprehensive treaty (default 30% rates)
Consult IRS Publication 901 (Tax Treaties) or a CPA in your country for specific rates.
Common tax mistakes by non-residents
- Not filing Form 5472. $25,000 penalty per failure. The most expensive mistake. Calendar reminders annually.
- Confusing 1040-NR with 1040. 1040-NR is for non-residents with ECI or US source income. 1040 is for US persons. Filing 1040 incorrectly can trigger residency arguments by the IRS.
- Filing a state return where you have no nexus. Wyoming-formed LLC selling to customers in California does not automatically create CA filing requirements. Nexus matters.
- Missing sales tax registration where FBA inventory creates nexus. Use TaxJar or Avalara.
- Forgetting Form W-8BEN-E with US payers (Stripe, Amazon). Without it, US payers withhold 30% on FDAP by default. Treaty rates are often 0% to 15%.
- Treating ITIN as required. ITIN is for personal US tax filing or PayPal verification. Most non-resident LLC owners do not need it.
- Reporting LLC revenue as your personal income on Form 5472. Form 5472 reports related-party transactions, not operating revenue. Customer revenue does not go on 5472.
- Treating disregarded LLC as a corporation. By default, foreign-owned single-member LLCs are disregarded entities for US tax. You report on Form 5472 + 1120, not as a C-Corp.
- Skipping home-country foreign asset disclosure. India, Brazil, Pakistan, and others require disclosure of foreign companies. Missing this can trigger home-country audits.
- Mixing personal and LLC bank accounts. Commingling weakens liability protection and complicates Form 5472 reporting. Keep accounts separate.
- Forgetting to update Form W-8BEN-E every 3 years. W-8BEN-E expires after 3 calendar years. Renew with US payers.
When to consult a US CPA
- You have ECI or think you might
- You have multiple US entities or a holding structure
- You have not filed Form 5472 in prior years
- You receive US-source FDAP income above $10,000/year
- You are considering electing C-Corp tax treatment
- You are relocating to the US or considering US residency
- You have substantial US clients and want a defensive ECI analysis
- You sell on Amazon FBA and want a formal ECI position
- You are converting your LLC to a C-Corp for a VC round
- You are operating in a regulated industry (fintech, insurtech) with complex US tax exposure
- You have crypto trading or staking income through the LLC