Does your non-US business actually owe US tax? ECI and "US trade or business" explained
Forming a US LLC doesn't make your income taxable in the US — and selling to American customers doesn't either. What does is a three-question test the IRS applies in a fixed order. Get the order wrong and you either overpay, or skip a filing that protects you.
"Do I owe US tax?" is the first question almost every foreign founder asks, and the internet's usual answers are both wrong in opposite directions: "you have a US LLC, so yes" and "you live abroad, so no." The law cares about neither fact. It asks what you do in the US, where the income comes from, and what a treaty says — in that order.
2. If you are, which income is "effectively connected" (ECI)? ECI is taxed at regular US rates, after deductions.
3. Does an income tax treaty change the answer? Treaties can turn a USTB into a non-taxable activity, but only if you claim them correctly.
The framework, one step at a time
The Code never gives one definition of a US trade or business. IRC §864(b) says it includes performing personal services in the US at any time during the year, then carves out exceptions. The IRS adds that owning and operating a US business that sells products or services generally counts, and that personal-services activity must be "considerable, continuous and regular."
What is not a USTB
- Brief, small services work: a nonresident alien present 90 days or fewer, paid $3,000 or less in total, working for a foreign employer that has no USTB (§864(b)(1); Reg. §1.864-2(b)). Both limits apply, and the $3,000 is easy to exceed.
- Trading securities or commodities for your own account, including through a US broker or agent, if you're not a dealer (§864(b)(2); Reg. §1.864-2(c), (d)). Commodities must be of a kind customarily traded on an organized exchange.
What can pull you in
- Partnership look-through: a partner in a partnership engaged in a USTB is treated as engaged in one (§875), including through a multi-member LLC taxed as a partnership.
- Facts and circumstances: missing an exception doesn't automatically make you engaged in a USTB (Reg. §1.864-2(e)), but it leaves the question open.
If you are not engaged in a USTB, none of your income is ECI, with narrow exceptions (the real-property election, and deferred payments from years when you were engaged). If you are engaged, §864(c) sorts income into three buckets:
- US-source passive income (FDAP) and capital gains: ECI only if the asset-use test (income from assets used in the business) or the business-activities test (the business was a "material factor" in earning it) is met — §864(c)(2).
- All other US-source income: automatically ECI. This is the "force of attraction" for business income: you don't need to show a link to the business (§864(c)(3)).
- Foreign-source income: generally never ECI. The exception is income attributable to a US office or fixed place of business — for example royalties from intangibles, certain banking income, and inventory sold abroad through that office (§864(c)(4)).
ECI is taxed on a net basis at regular rates (§871(b) for individuals, §882 for foreign corporations), and a foreign corporation may also owe the 30% branch profits tax under §884, reducible by treaty only for a "qualified resident."
US-source FDAP income — interest, dividends, rents, royalties and similar items — that is not ECI is taxed at a flat 30% of the gross amount (§871(a)(1) for individuals, §881(a) for foreign corporations), with no deductions. It's normally collected by the payer through withholding, so for many foreign owners it is the only US tax they ever pay.
- Treaty rates can reduce it, claimed to the payer on Form W-8BEN or W-8BEN-E.
- Portfolio interest is exempt for a nonresident individual if the debt is in registered form, the payer gets a foreign-status statement, and the recipient isn't a 10% shareholder (§871(h)).
- US rental property: rent is FDAP at 30% of gross by default, but you may elect to treat it as ECI and be taxed on net rent (§871(d) for individuals, §882(d) for corporations). The election stays in force until revoked with IRS consent.
- Selling US real property is ECI regardless (FIRPTA), and the buyer generally withholds 15% of the price (§1445; Forms 8288/8288-A).
Under most US income tax treaties, business profits are taxable only in your home country unless you carry on business in the US through a permanent establishment (PE). In the US Model Convention (2006 text), a PE is "a fixed place of business through which the business of an enterprise is wholly or partly carried on" (Art. 5(1)), and profits are taxed only to the extent "attributable to that permanent establishment" (Art. 7(1)).
- Storage, display or delivery: facilities used solely for these purposes are not a PE (Art. 5(4)).
- Dependent agents: a person with authority to conclude binding contracts for you can create a PE (Art. 5(5)); an independent broker or commission agent acting in the ordinary course does not (Art. 5(6)).
Try it: where does your situation land?
Pick the facts that fit. The checker applies the rules above and shows the likely US tax result and the filing that goes with it. It is a first screen, not an opinion on your return.
At a glance: how each income type is taxed
| Income type | If NOT engaged in a USTB | If engaged in a USTB |
|---|---|---|
| Services performed in the US | Not possible — US services are generally a USTB (small 90-day / $3,000 exception) | ECI, taxed net at regular rates |
| Services performed outside the US | Foreign-source; no US income tax | Foreign-source; generally not ECI |
| Goods sold, title passes outside the US | Foreign-source; no US income tax | Not ECI unless attributable to a US office |
| Goods sold, title passes in the US | US-source, but the activity itself usually makes you engaged | ECI |
| US interest, dividends, royalties | 30% of gross (treaty may reduce; portfolio interest may be exempt) | 30% of gross, or ECI if asset-use / business-activities test is met |
| US rental income | 30% of gross, unless you elect net-basis ECI treatment | ECI or 30%, depending on the tests / election |
| Sale of US real property | ECI under FIRPTA; buyer withholds 15% | ECI under FIRPTA |
Filing forms and deadlines (and the deduction trap)
Nonresident individuals (Form 1040-NR). A nonresident alien engaged in a USTB must file, even if the income is treaty-exempt. The due date is the 15th day of the 6th month after year-end (June 15 for calendar-year filers), or the 15th day of the 4th month (April 15) if you have wages subject to US withholding (Reg. §1.6072-1(c)).
Foreign corporations (Form 1120-F). Due the 15th day of the 4th month after year-end if the corporation has a US office or place of business, and the 15th day of the 6th month if not. Form 7004 extends the due date.
Foreign partners in a US-trade-or-business partnership. The partnership withholds on each foreign partner's share of ECI under §1446 — 37% for non-corporate partners and 21% for corporate partners — reporting on Forms 8804, 8805 and 8813. If a foreign partner sells an interest whose gain would be ECI under §864(c)(8), the buyer generally withholds 10% of the amount realized (§1446(f); Forms 8288/8288-A).
The deduction trap. Deductions and credits against ECI are allowed only if you file a timely and accurate return. For a foreign corporation, "timely" is generally within 18 months of the due date (Reg. §1.882-4(a)(3)); for a nonresident individual it is within 16 months (Reg. §1.874-1(b)). A corporation with limited US activity that believes it has no ECI may file a protective return to preserve deductions in case it is later found to be wrong. If you did not file a return for the prior year, the window can close even sooner: on the earlier of the 16- or 18-month date and the date the IRS mails a notice that the return is missing. Miss the window and you can owe tax on gross income.
Gray area: inventory stored in US warehouses (marketplace fulfilment)
Foreign sellers who ship goods into US fulfilment centres and sell from there are the most common real-world version of the "goods_us" case in the checker. The statute and regulations above point toward ECI when you regularly sell inventory in the US and title passes here, but we are not aware of IRS guidance written specifically for marketplace fulfilment, and practitioners differ on edge cases (for example, whether a treaty's storage-and-delivery exclusion protects a seller who only warehouses goods). Treat it as a facts-and-circumstances question, price it before you scale, and if you rely on a treaty, disclose it on Form 8833.
Common mistakes
- "No US tax means no US filing." Form 5472 for a foreign-owned US LLC is triggered by ownership and reportable transactions, not profit.
- Assuming a US LLC makes all income US-taxable. The LLC's state of formation is not the test.
- Not filing because you think you have no ECI. If you're wrong, you may lose your deductions. A protective return costs far less than that.
- Claiming a treaty without Form 8833. The penalty is per failure, and it is separate from any tax.
- Treating the 90-day / $3,000 services rule as a safe harbor. It has to meet both numbers and the foreign-employer condition.