This topic causes a lot of confusion, and it's not uncommon to receive conflicting answers from the IRS itself. The following guidelines help determine whether an LLC owned by nonresident alien(s) has to pay US tax and/or file a federal tax return. This blog post only covers LLCs formed in the U.S. by nonresident individuals (not entities).
LLC is a “disregarded
entity” for federal income tax purposes. That means that the IRS does not tax
the LLC itself, but instead looks at the LLC’s owner(s) for tax status
determination. Therefore, rules applicable to nonresident alien individuals
apply. Generally speaking, LLCs owned by nonresident aliens do not have to file
a federal tax return unless they a) have “U.S. source income” and/or b) “engage
in a U.S. trade or business.” Note that the LLC owner will have to file a tax
return if the LLC is engaged in a U.S. trade or business, even if that trade or
business did not produce any U.S. source income. The IRS uses the following
rues to determine the source of income and the location of a trade or business.
U.S. source income
The first step to decide whether a nonresident
alien has to file a federal tax return is to determine whether the alien
received any U.S. source income.
Type of income
|
Factor determining source
|
|
Business income: personal services
|
Where services performed
|
|
Interest
|
Residence
of payer
|
|
IP royalties (patents, copyrights, etc.)
|
Where IP is used
|
|
Sale of personal property
|
|
|
Sale of real property
|
Location of property
|
For example, if a nonresident alien software
developer forms a Delaware LLC to perform services for U.S. clients, payment
for such services would not be considered “U.S. source income” if the developer
performs the services from a foreign country.
U.S. trade or business
The second step to decide whether a nonresident
LLC owner has federal tax filing obligations is to determine whether the LLC is
engaged in a U.S. trade or business. Note that even if that LLC generated only foreign
source income, nonresident aliens must still file federal tax return 1040NR if they
are “engaged in a U.S. trade or business” (IRS Publication 519, p. 33). Simply registering an LLC is not considered being engaged in
Foreign source income may be considered to be
effectively connected with a trade or business in the United States if:
1) You have an office or other fixed place of business in
the United States to which the income can be attributed,
2) That office or place of business is a material factor in
producing the income, and
3) The income is produced in the ordinary course of the
trade or business carried on through that office or other fixed place of
business.
An office or other fixed place of business is
a material factor if it significantly contributes to, and is an essential
economic element in, the earning of the income.
Conclusion
If nonresident alien owners of a U.S. LLC do
not maintain an office or other facilities in the U.S. and do not receive U.S.
source income, they are not obligated to file a federal tax return. They may
still have tax liability to the state where the LLC is formed, however,
normally the states follow the above described federal pattern and do not tax
income unless the LLC has an actual office in the state or receives income from
activities within that state. For example,
Read next:
- IRS Publication 519, U.S. Tax Guide for Aliens
- US companies and US bank accounts (for foreign and domestic clients)
- Регистрация оффшорной компании в Делавэр, США (Registering a Delaware company)
Read next:
- IRS Publication 519, U.S. Tax Guide for Aliens
- US companies and US bank accounts (for foreign and domestic clients)
- Регистрация оффшорной компании в Делавэр, США (Registering a Delaware company)
