NOTE: PLEASE CONSULT A TAXATION EXPERT FOR YOUR QUERIES. THE BELOW CONTENT IS FOR GENERAL UNDERSTANDING AND IS NOT THE FINAL VERDICT
Before starting you must know what LLC is in terms of the Tax System. An “LLC” Limited Liability Company is a pass-through entity which means that LLC is not taxed directly, but the transactions, expenses, losses, or profits are passed through to its owner. So Owner is answerable for the loss/profit of LLC on their tax return.
Is a foreign owner Tax Exempted in the USA?
An LLC registered by non-US Residents can allow earnings that are not taxed in the USA but to certain rules.
First thing first LLC owners have to pay TAXES if they are conducting business in the USA, such scenarios are termed as ETB in accounting language which means conducting business in the USA.
You are Conducting Business in the USA if:
1. You have Employees/Agents/Agencies working for your LLC and residing in the USA
2. Your work is “engaged with the LLC continuously or considerably”
In the USA there is not a clear standard of “engaged with the LLC continuously or considerably” by the court nor the boundaries which define ETB. Hence this causes an efficient risk to Foreign Owners.
In such cases, there are some legal policies established to deal with! So the USA has set TAX TREATY “The United States has tax treaties with a number of foreign countries. Under these treaties, residents (not necessarily citizens) of foreign countries are taxed at a reduced rate, or are exempt from U.S. taxes on certain items of income they receive from sources within the United States.”. VIEW LAWS FOR PAKISTAN
Depending on Treaty you can prove being Taxed in the parent country and find other ways to cover taxes.
NOT TAXABLE IN THE USA
1. Personal Services from abroad
2. Selling Digital Products
3. Web Design and Services (Depending on Cases)
4 . Selling Physical Products if shipped from outside of the USA
If the business is being transacted within the USA would be taxable. This statement tells us that shipping from 3rd Party Marketplace within the USA or Personal Services provided within the USA are taxable.
How do I know if I have a dependent agent?
As we discussed before Dependent Agents are those who serve our LLC and are Residing in the USA.
Here comes 2 scenarios:
Software Companies Providing Services:
An IT Company in Pakistan providing services and sales to US Clients. This company has no employees in the USA or the office. All work is being done over the phone or the internet.
But for payment purposes, the company has been registered in the USA to open Bank Accounts in the US. The work is being performed in Pakistan where the owners are non-US Residents. Hence the LLC income is not Taxed. (AS NO DEPENDENT AGENT OR OFFICE IN THE US).
“Fulfillment by Amazon” Service Provider:
A foreigner entrepreneur sells products in the USA via Amazon Fulfillment (3rd Party Marketplace/3PL). Products are sourced, managed, and marketed online by the entrepreneur. Products land at Amazon Warehouse where amazon’s employees manage Pick, Pack Ship.
In this case, Amazon is not the dependent agent for such LLCs but itself an independent business with millions of clients. Amazon might not be a dependent agent but it still offers LLCs considerably. Also that if the foreign owner is not the manufacturer but the wholesaler, here the transaction within the US is taking place.
As the laws are still vague in such situations, you may have to pay income tax.
Learn More About LLC and C Corp which you might consider to pursue with.