What is effectively considered "us source income"

[Fazoule]

I have been reading a little around the benefits a Nonresident Aliens with a Single-Member LLC could have, especially from the anonymity stand point more than tax optimisation.

- A European IT consultant who owns a New Mexico LLC
- Has never put foot in the US
- Doing all the work online from outside the US
- He only has one single US client
- Getting paid in USD
- Signing a W9 form (on the name of his LLC) in order to get paid

Does this scenario makes the IT consultant have Effectively Connected Income (ECI) / FDAP Income or any other income that would have to be taxed in the US ?

I'm asking this because by reading on the IRS website and other papers online this sentence:
"You are considered to be engaged in a trade or business in the United State" and "This applies whether or not there is any connection between the income, and the trade or business being carried on in the United States, during the tax year"

I don't understand if they mean "in" as "the person doing the work must be inside the US" or if the work is being done "for" a US entity regardless from where the person is when doing the work.

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[jim7]

I'm investigating similar things. Had chosen Delaware LLC, but then realised New Mexico offers the same but cheaper. OK, so you don't get a more commo/pro sounding Delaware address - in fact you get better. You can have a NM LLC listed with an address in Fifth Avenue, New York or Cupertino, California - in fact anywhere in USA. NM doesn't care.

The person doing the work must be outside the USA for it not to be classed as US income. Now you could load-up on non-US VPNs (or setup a VPN server at home before you travel) but I'll actually use any future USA visits as vacation time.

It would be very dumb for IT contractors to setup a LLC if it meant clients/payments couldn't come from USA as it is a huge % of the market!

 

[exprtadvisrdev]

If you live in Europe, there is a possibility that the LLC will become resident where you live and pay taxes there as a regular corporation. It's better to talk with a local accountant who can confirm you that.

No about the principal question, how many clients will your LLC have? If the LLC will only have one client and that client is from the US then you are subject to US taxes.

You can have a NM LLC listed with an address in Fifth Avenue, New York or Cupertino, California - in fact anywhere in USA. NM doesn't care.

If you are talking about the corporate address then that's incorrect, if you have a NM LLC which address is in another state then you trigger a foreign company in the state you have the address, for example if the address of your company is in California, then you will need to incorporate in NM as a local LLC and in California as a foreign LLC.

 

[jim7]

If you are talking about the corporate address then that's incorrect, if you have a NM LLC which address is in another state then you trigger a foreign company in the state you have the address, for example if the address of your company is in California, then you will need to incorporate in NM as a local LLC and in California as a foreign LLC.

I understood differently after reading around. Perhaps you'd be kind enough to explain to me in layman's terms how I am wrong?

Source of quote below:- How to Open an LLC as Non-Resident + Bank Account & Stripe - Globalization Guide

In New Mexico the principal place of business and the mailing address actually do not even have to be in New Mexico, so you can pick any city in the US that you like.

Is there a difference between principal place of business and corporate address? I just want to see "Jim's LLC, Cupertino, California" on my business cards rather than N. Mexico.... but I don't wanna be taxed to hell in the US or have to pay more LLC fees to do so!

 

[Fazoule]

If you live in Europe, there is a possibility that the LLC will become resident where you live and pay taxes there as a regular corporation. It's better to talk with a local accountant who can confirm you that.

Yep, like noted the original post, this is more about privacy than tax optimisation. The IT consultant will be definitely paying corp taxes in his country but that is fine as long as he doesn't also have to pay them in US

No about the principal question, how many clients will your LLC have? If the LLC will only have one client and that client is from the US then you are subject to US taxes.

Not exactly a client per se but more a service. AdSense like revenue. And yes he will only be paid by one service.

 

[exprtadvisrdev]

I understood differently after reading around. Perhaps you'd be kind enough to explain to me in layman's terms how I am wrong?

Source of quote below:- How to Open an LLC as Non-Resident + Bank Account & Stripe - Globalization Guide


Is there a difference between principal place of business and corporate address? I just want to see "Jim's LLC, Cupertino, California" on my business cards rather than N. Mexico.... but I don't wanna be taxed to hell in the US or have to pay more LLC fees to do so!

If you want to show California in your business card, it's better to start your LLC in California. Yes, you can register your NM with an address in another state (as the guide you provided says) but as I said that could trigger a foreign LLC status and you could end up paying stuff in both states (well, NM doesn't have annual fees so you will only pay it in CA). Read about domestic LLC vs foreign LLC and check form LLC-5 in CA's government website... Now, in this case it's better to talk to an attorney in the US.

Not exactly a client per se but more a service. AdSense like revenue. And yes he will only be paid by one service.

I think you won't need to pay taxes there because it's an internet service but your case is a vague case in the IRS since they don't specify what is considered “considerable, continuous, and regular business in the US" so who knows what they will say. Talk to an accountant in the US who knows about this kind of services, they will know better.

 

[Fazoule]

Just for others that would stubble on this post.
I have called multiple American CPA and they all confirmed that, since the IT consultant is providing a "service, It doesn't matter if the client is American or if it's one or multiple clients. What counts is "from where" the service is performed.

In my case, the IT consultant is providing service from UK so there will be no income taxable in the US, all the tax will have to be paid in UK.
All that the IT consultant needs to do is fill 2 forms (I don't remember the numbers) just to disclose that income and file the annual return every year.

 

[joffreylol]

Thank you Fazoule. I was under the same impression but people here like FAS who is CPA insist that it has to with how many members there are in LLC and yada yada. You have to fill forms 5472 and possibly 1040-NR.

 

[Fazoule]

Yea, I'd say expect from @Sols maybe, ignore all what you read on here.
(and yes those were the two forms)

 

[CryptoIsFreedom]

Thank you Fazoule. I was under the same impression but people here like FAS who is CPA insist that it has to with how many members there are in LLC and yada yada. You have to fill forms 5472 and possibly 1040-NR.

In what scenario is 1040-NR needed?

 

[joffreylol]

I'm not really sure and if you ask CPA they might not give you a proper answer. They might want to sell you 1040-NR filling without it being required. I didn't use US LLC yet so I can't tell. From what I read on this forum I would consult ustax.bz because he seems to understand nonresident aliens best, he is not cheap.