Is it US-sourced income or not? App revenue going from Apple Inc to US LLC, for an app business run from outside the US and by a non-resident alien

[Asterion]

As per the lengthy title.

Can the revenue of such a set up be classified as non US-sourced income and therefore passed on to the sole proprietor of the US LLC without US corporate tax?

Please note, the app revenue comes from an entirely digital product that is completely contained in the app (i.e. it's not an app to order at a restaurant), so there is no way to route the revenue through Stripe, PayPal etc etc. Apple/Google will want their share of the revenue and the payments will have to go through them.

Variation:
Would excluding the USA as a market in the App Store (i.e. you don't make it a country of your product in the App Store, so US App Store user can't buy it) make any difference? I mean, that revenue would truly be earned outside of the US, it's just that Apple Inc in the US wants a cut.

 

[Asterion]

Update:
I've read in a popular article about Wyoming LLCs that the revenue you get passed on by Apple after they have taken their 15% (30% if your turnover is over 1 million) is classified as royalties and therefore always layable to witholding tax in the US (presumably at a federal level).

Counter update:
A thread of the official forum of Apple developers quotes a message from Apple Finance Support explaining that
Since the App Store contracts are characterized as a "sales/commission" agreement, as opposed to a "royalty" agreement, there is no tax withholding for sales in the USA App and Book Stores.
[…]
Under our current model, application sales by non-U.S. developers or publishers on the App Store or Book Store are not subject to U.S. tax withholding or reporting.

It's unclear to me how can you be a non-US based developers dealing with Apple US. Unless it's different for individual devs as opposed to organisation devs.

 

[startfleetio]

Apple Support has already responded to you, hasn't they. it is a sales/commission type of income.

 

[Asterion]

OK, thanks. Then the next question is: can it count as US-sourced income, given the above specifications?

 

[CyprusLawyer101]

OK, thanks. Then the next question is: can it count as US-sourced income, given the above specifications?

If you dont source any income from sales in the US then I would assume it does not count as US source income, although there is also the "effectively connected income" drfinition you need to look into. A US tax professional should be able to clarify this.

 

[startfleetio]

OK, thanks. Then the next question is: can it count as US-sourced income, given the above specifications?

It is normally regarded as sale of copyrighted article or lease of copyrighted article if you are offering digital product downloads. The source of income for sale or copyrighted article is still very convoluted, depending on how you treat the title passage rule of a digital software. Normally, how legal advisers recommend is not to transfer the title of the software to the end user in the EULA.

One thing to note however, even if you have US source income, it doesn't mean you are subject to tax. You need to look at the USTB concept as well, and if your country has a tax treaty with the US, you just need to file for protective filing to claim no permanent establishment.

 

[Asterion]

Thank you Starfleetio. I'm a EU-national who is UK resident, UK tax resident but not domiciled. In my case, as long as foreign income is not brought to the UK (i.e. transferred to a UK bank account), the UK is cool with not taxing it at a personal level for me. I don't even have to declare it.

Thanks for the note in your second paragraph. As far as you know, what can give a final word about how the IRS will see you/treat you? Do you get some sort of official decision done by them after having asked the question with a lawyer or something? If you get the "OK, it's not US taxable income", is it forever (as long as the laws don't change of course)? Can they change their minds?

If you dont source any income from sales in the US then I would assume it does not count as US source income, although there is also the "effectively connected income" drfinition you need to look into. A US tax professional should be able to clarify this.

Hi! So effectively, if I were to exclude the US as a country of sales in the App Store, that should put me even more in a position in which my income can be considered as non-US sourced income.
I'll ask you the same question I've asked to starfleetio: how does this status get finalised? Do you get a waiver from the IRS once they have considered your case? Do you just stay quiet and hope they'll never notice? Do you do the forms and hope the "case manager/handler" agrees with you?

Many thanks

 

[startfleetio]

Even if you do NOT have a US LLC, and one day the US Tax code specifically say that selling on Apple AppStore is taxable, you are still taxable even without a US LLC. But, this would mean all of a sudden, all non-resident aliens (and foreign corporations) who never had a US entity are liable to US Federal taxes.

Your tax position does not change by the virtue of having a LLC. LLC is a transparent entity, it looks through to the member, which in your case is a Non-Resident Alien.

The topic could get very convoluted because there's no advance ruling on this from the IRS. You can find two US lawyers having two very different interpretation on this issue. Since you are a UK tax resident, you could just file a protective filings and be not worried about this anymore.

 

[alain]

I have a similar situation (not personally) and was wondering how you went through all of this OP? I would really like to have a chat here or by DM with you?

 

[CyprusLawyer101]

Hi! So effectively, if I were to exclude the US as a country of sales in the App Store, that should put me even more in a position in which my income can be considered as non-US sourced income.
I'll ask you the same question I've asked to starfleetio: how does this status get finalised? Do you get a waiver from the IRS once they have considered your case? Do you just stay quiet and hope they'll never notice? Do you do the forms and hope the "case manager/handler" agrees with you?

Many thanks

Just saw this was left unanswered, maybe not relevant any longer but here : yes if you were to exclude any US sales, then you should be safe to assume that you have no US tax implications. With respect to establishing this status I would say to follow the filing and other requirements of the US LLC which apply when no US income and taxes are involved