Opening an LLC in the United States as a non-resident provides a series of attractive tax advantages.
Specifically, taxes will not be paid as a company, but the owners must report in their personal statements the benefits they receive from the LLC and pay them in your country of residence.
However, this is only possible if the company does not qualify as ETBUS. If the company is not ETBUS, even if it generates income in the United States, this income is not taxed in that country.
To clear up your doubts, below we will tell you what exactly this category means, how to know if your business is part of it and what taxes you will have to pay if so. Let's get started!
What is ETBUS?
ETBUS (Engaged In Trade or Business in the US), is a term that designates a company outside the USA involved in business within the USA.
Basically, it is a concept that is used in the tax and corporate environment and refers to those companies that have a significant level of traffic of US goods or users in their operations.
By being within the ETBUS classification, an LLC must tax state taxes and federal in the United States.
How do I know if my business is ETBUS?
A company can be considered an ETBUS if:
- It has at least one "dependent agent" in the United States, that is, employees or companies that work almost exclusively for you, and
- This dependent agent allows it to carry out its activity in the United States,
- It carries out a "substantial, continuous and regular" activity in the United States. The courts have not established a clear and precise standard of what constitutes a "substantial, continuous and regular" activity.
- There are members of the LLC who are American residents.
- You have permanent physical establishments in the United States
In addition, other circumstances can convert your business to ETBUS. The tax code and court decisions are vague regarding the definition of ETBUS.
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IRS Criteria for ETBUS Qualification
The IRS uses these 3 criteria to define whether a company is ETBUS or not.
Provision of services within the USA
First, your company will qualify as ETBUS if you perform any type of work or offer any type of service while you are physically within the United States.
According to the IRS's own laws, only compensation for work or personal services performed outside the country is considered income from a non-US source.
Permanent establishment in the United States
On the other hand, if you have a permanent establishment in the United States, your business will also be included within the ETBUS category.
At this point, you must understand that the collected body considers that your company has a permanent establishment if it has a fixed center of activity that acts as a material factor in the creation of income or an agent or seller with authority to enter into contracts for the company within the country.
Perception of certain types of income
In turn, fixed, determinable, annual or periodic (FDAP) income is subject to state and federal taxes even if your LLC does not carry out activities within the country.
Now, FDAP income are:
- Rent
- Interest
- Dividends
- Salaries
- Premiums
- Compensation
- Remunerations
- Annuities
ETBUS qualification examples
I understand that these concepts can be confusing. Let's see things more clearly with examples.
Example 1: Foreign software company without office or representative in the United States
An Argentine software company develops for American clients. The offices are in Argentina and it does not have offices or employees in the United States. Members are not American residents or citizens. All sales are made by video calls.
In this case, the LLC's income is not subject to tax in the United States, since it does not qualify as ETBUS.
Example 2: Foreign software company without office or representative in the United States
A foreign businessman uses the "Fulfillment by Amazon" service to sell products in the US market:
- The businessman is not American and resides in Venezuela. Manage your business online
- Products are sorted and sent to Amazon warehouses in the USA, where Amazon employees are responsible for packaging and shipping the products to customers in the USA.
- Amazon does not act as a dependent agent, as it has its own operations with millions of other customers.
- Although Amazon is not a dependent agent, the seller could be considered ETBUS. If the seller does not manufacture the product, the transaction and the transfer of ownership occur in the US, the company may have to pay US income taxes.
As the ETBUS legislation is gray, it is recommended to consult with a tax professional to ensure the situation.
What taxes would I have to pay if I am ETBUS?
If, unfortunately, your LLC qualifies as ETBUS, then you will have to pay various state (depends on each state) and federal (paid nationally to the IRS) United States taxes.
Federal income tax
This tax, one of the most important in the country, is paid to the IRS proportionally to your income. Below is a table with the details:
| Tax Base | Tax Due |
|---|---|
| Not more than $11,000 | 10% of taxable income |
| $11,001 - $44,725 | $1,100 + 12% of the excess over $11,000 |
| $44,726 - $95,375 | $5,147 + 22% of the excess over $44,725 |
| $95,376 - $182,100 | $16,290 + 24% of the excess over $95,375 |
| $182,101 - $231,250 | $37,104 + 32% of the excess over $182,100 |
| $231,251 - $578,125 | $52,832 + 35% of the excess over $231,250 |
| More than $578,125 | $174,238 + 37% of the excess over $578,125 |
State income tax
Meanwhile, the state income tax you must pay in your personal returns. However, only some LLCs pay this type of tax depending on status and income.
For example, in California, limited liability companies that earn more than $250,000 a year must pay between $900 and $11,000.
Annual tax
Just like the state income tax, the annual tax is paid depending on the state in which your LLC is located. In this case, the subscription will be mandatory, regardless of whether or not you generate income.
State sales tax
Another tax to pay if your company qualifies as ETBUS is the state sales tax, which is applied when a product or service is sold and is paid to the state where the transaction was made.
Except for the five states that do not apply this tax (Alaska, Delaware, Montana, New Hampshire and Oregon), the rest have fairly high non-taxable minimums, generally over USD 100,000.
Payroll tax
If you have an employee residing in the United States or one or more members of the LLC residing in the country, you must pay the payroll tax, which is 7.65%, composed of Social Security (6.2%) and Medicare (1.45%) . The remaining 7.65% to make up the total 15.3% must be paid by the employee.
Corporate tax
If instead of an LLC you have a corporation, you must also pay corporate taxes on income at the corporate level (21% of total taxable income). In addition, the amounts will also be taxed at the individual level (double taxation)..
Special tax
Last, but not least, there are some special taxes or consumption taxes, which are normally paid on fuel, heavy trucks, plane tickets and tobacco.
As you can see, if your LLC qualifies as ETBUS, you will have to pay a few taxes that can seriously affect your financial situation and that of your business, so it is essential that you get very good advice to verify that you do not fall into this category (if you can avoid it).
Schedule a free consultation about your LLC
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Written by
Ignacio Navarro
Ignacio Navarro is a Certified Public Accountant, graduated in 2020 from the National University of Tucumán. Founder of Start Companies since 2023, he advises clients worldwide on forming LLCs in the United States and on proper tax filing. His expertise combines legal, tax, and practical knowledge, offering a comprehensive service that spans from company formation to bank account setup and sales platform integration.
