The Highlights
- Non-US sellers face income taxes under ECI or FDAP (interests or royalties) income.
- Tax treaties can help your business secure exemptions from US tax.
- Maintaining a permanent establishment, such as an office or warehouse, typically brings foreign businesses under US income tax obligations.
Foreign business tax is one of the biggest hurdles any non-US business needs to clear when growing its operations. Orders arrive all over from California, NY, Texas, and other states, and the central question remains: does my business now owe US income tax on those profits?
Find out everything you need to know about US international business taxation with this RJM Tax Exemption income tax guide.
How Does US Income Tax Work for Non-US EcommerceEntities?
The United States taxes foreign persons and entities very differently from domestic ones. While US citizens and residents are taxed on worldwide income, non-US individuals and foreign corporations are typically taxed on just two categories of income:
- Effectively Connected Income (ECI) with a US trade or business, which is taxed on a net basis at graduated rates.
- Fixed, Determinable, Annual, or Periodical (FDAP) income (like royalties/interest), which is subject to a flat percentage withholding tax. ECI is the main factor for most foreign businesses, so we’ll focus on that for this deep-dive.
How Effectively Connected Income Works
For US income tax to come into play for non-US ecommerce entities, the business needs to be engaged in a ‘US trade or business’ (USTB), and the income from their sales needs to be effectively connected to the business.
In other words, simply shipping products to US buyers from your home country will not automatically constitute a USTB. For foreign business tax, the IRS looks at factors like:
- Whether the person is in a partnership that is engaged in a trade/business in the US.
- Income from rental of real property (in some cases)
- Whether there are US employees, offices, or agents acting on a non-resident’s behalf.
No USTB?
Non-US ecommerce businesses may need to pay US income tax if ECI can be proved. If no USTB exists, profits from your inventory sales are usually treated as foreign-source income and may be free of US taxation.
The Role of Tax Treaties
Tax treaties can completely redefine the way foreign businesses engage with US taxation. The United States has active income tax treaties with over 60 countries, including:
- Canada
- The UK
- Australia
Tax treaties work to provide an additional layer of protection for foreign businesses. Typically, business profits of a resident of the treaty country are exempt from US tax. There is, however, one notable exception.
The Permanent Establishment (PE) Exception
US income tax affects non-US ecommerce businesses even under some tax treaties if the profits are attributable to a PE. A PE simply refers to a fixed place of business, whether that’s an office, warehouse, or a dependent agent who works on your behalf.
The good news? As far as foreign business tax is concerned, PE thresholds are usually a lot more favorable than the broader USTB test we mentioned earlier. If you’re worried about US international business taxation as a non-resident, check for active treaties in your home country.
Common Ecommerce Practices That Affect Your Tax Obligations
International businesses need to be aware of the various fulfillment/sales models that can create US income tax obligations for non-US ecommerce brands.
Direct Shipping From Your Home Country
In this case, the products don’t enter the US before a sale is made. There is no US inventory or staff. As far as the USTB test and PE threshold are concerned, your business should be free of US income tax obligations.
Using Amazon FBA or Other US-Based Fulfillment Centers
Inventory is directly stored in US warehouses in this case. Treaty-country sellers will be happy to know that using third-party services like Amazon FBA typically doesn’t create a PE, since the foreign business does not directly control the warehouse.
While US income tax for non-US ecommerce might not be a concern, it’s worth pointing out that using Amazon FBA does create a physical nexus under state-level laws, which might create obligations. Check with a trusted income tax expert if your business works with third-party warehousing.
Image URL: https://unsplash.com/photos/cardboard-boxes-and-packaging-supplies-in-a-warehouse-RVP3wAw9gJY
Alt-text: Lots of cardboard boxes stacked together
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Drop-Shipping from US Suppliers
Foreign business tax is not a problem if your US supplier ships directly to customers. This arrangement is typically treated as foreign-source income if and only if you have no other US presence, such as warehousing or remote employees.
Having US Employees/Contractors/Offices
Any of these will almost certainly create both a PE and USTB, triggering full US income taxation for non-US ecommerce businesses.
Do Foreign Businesses Need To File When No Tax is Due?
Yes. There are certain information return requirements set in place for foreign sellers even when no tax is due. For example, Form 5472 applies to US LLCs belonging to foreign owners, tracking transactions between LLCs and the non-resident.
Similarly, the W-8BEN may need to be provided to marketplaces like Amazon or Etsy if a foreign business owner is claiming treaty benefits.
As far as US international business taxation is concerned, these filings work to build a paper trail that protects you and allows you to bypass the 30% withholding on gross payments.
Simplified Compliance for Non-US Businesses
Navigating US income tax for non-US ecommerce businesses is a breeze when you’re working with the #1 tax experts on Trustpilot. Get a free consultation with RJM Tax Exemption and find out how our experts can help your business secure key exemptions, grow faster, and stay compliant with foreign business tax.
Frequently Asked Questions
Do I owe US income tax if I sell to US customers as a foreigner?
Not necessarily. A taxable presence isn’t created purely by sales volume. Your business needs to meet the USTB test and/or maintain permanent establishments through an office or warehouse to be subject to US income tax.
How do US tax treaties protect foreign sellers?
US income tax for non-US ecommerce sellers is simplified if your home country has a tax treaty with the US. Treaties exempt business profits from US tax unless profits can be attributed to a permanent establishment.
Do I need to file tax forms even if my foreign business owes no US tax?
In most cases, yes. Forms like Form 5472 (for LLCs) and the W-8BEN (for foreign businesses using marketplaces like Amazon/Etsy) are required even if you don’t owe any US tax this year.
