A LLC in the United States for non-residents It can be an alternative for international professionals and consultants who develop business with clients from different markets.. However, constituting it raises a fundamental question: Does having a US LLC mean that all income earned through it is subject to US federal income tax??
For a non-resident foreigner, The answer does not depend solely on the country in which the company was incorporated, of the customer's location or the bank account in which the payment is received. In the case of income from personal services, one of the determining factors is where those services are physically provided.
He IRS establishes, as a general rule, that the place where personal services are performed determines the source of that income. This means that services performed outside the United States can be considered foreign source income., even when there are certain commercial links with that country.
LLC in the United States for non-residents: services provided from abroad
A non-resident professional can operate through a US LLC and provide consulting services, technology, administration or other professional services from another country.
In accordance with the general rules for determining the source of income outlined by the IRS, the fact that the client is in the United States, The fact that the contract was entered into with a US company or that the payment reaches a bank account in that country does not in itself determine that the income from personal services is from a US source.. The place where the work is physically carried out is a fundamental element of the analysis.
Let's think, For example, in a non-resident consultant who forms an LLC in the United States and works with US clients, Europeans and Latin Americans, but it performs its services completely from outside the United States territory.
In those circumstances, Operating through a U.S. LLC does not automatically convert income from those services to U.S.-source income.. The tax treatment, however, must be evaluated considering the structure of the LLC and the particular circumstances of the operation.
What a non-resident professional should analyze
Determining the tax treatment of an LLC requires looking beyond the place where it was incorporated.
Among the aspects that must be analyzed are where services are physically provided, How the LLC is classified for US tax purposes and whether there is a trade or business in the United States (U.S. trade or business).
It must also be determined if there is income effectively related to a commercial activity or business in the United States. (Effectively Connected Income o ECI) and if any part of the services is performed while the professional is physically located in US territory. These are precisely the factors highlighted in the analysis prepared by Castellon | Halloun.
The distinction is relevant. The IRS notes that, generally, when a foreign person participates in a commercial activity or business in the United States, US-source income associated with that activity may be considered ECI and subject to taxation in the United States. The tax authority also warns that, in limited circumstances, certain foreign source income may receive this treatment.
For this reason, It is not enough to state that an LLC is owned by a non-resident or that services are provided from another country. The structure and actual operations must be analyzed together.
This analysis is part of a broader evaluation of the cross-border tax risks that may arise when a company or a professional develops activities in different jurisdictions.
Structure and documentation are decisive
A LLC in the United States for non-residents can be a useful structure for developing international business, but its constitution does not determine by itself the tax treatment of all the income of its owner.
For a non-resident professional who provides services entirely outside the United States, that income can generally be considered from a foreign source. However, the tax classification of the LLC, the existence of commercial activities in the United States, The nature of the income and the owner's particular circumstances may modify the analysis.
Adequate structuring from the beginning and documentation consistent with the real operation are, therefore, fundamental. Before adopting a structure or assuming a certain tax treatment, Each situation must be reviewed individually by a professional specialized in US international taxation..
Frequently asked questions
Does having an LLC in the United States mean paying US federal tax on all income?
Not necessarily. The formation of an LLC in the United States does not alone determine the source or tax treatment of all income. They must be analyzed, among other factors, the nature of income, where the activity is carried out and the tax classification of the entity.
What happens if the client is in the United States, but the professional works from another country?
For income derived from personal services, The IRS establishes as a general rule that the source is determined by the location where the services are physically performed, not simply by the location of the customer or the place of payment.
What happens if part of the work is physically performed in the United States?
The analysis changes. When services are performed partially within and partially outside the United States, The IRS contemplates rules to allocate income between both sources.
Content developed from the technical contribution of Castellon | Halloun, ICG member in the United States.
