Effectively connected income is income a non-US person earns from a trade or business in the US. It is taxed at the normal graduated rates after deductions. Whether a foreign-owned LLC run from abroad has any ECI depends on the facts, mainly whether it has people, an office or other real activity in the US.
US tax law sorts a non-resident's US income into two groups. ECI is business income connected with a US trade or business. It is taxed like a US taxpayer's income, at graduated rates, on Form 1040-NR for individuals or Form 1120-F for foreign corporations. FDAP income is passive US-source income such as dividends, interest and royalties. It is usually taxed at a flat 30%, or a lower treaty rate, withheld at source.
The IRS looks at what actually happens in the US. Signs that point toward a US trade or business include an office or warehouse in the US, employees or contractors working in the US, or a dependent agent there who signs contracts for you. A single-member LLC owned by a non-US person is disregarded, so its activity is treated as the owner's activity.
A designer in Pakistan runs a Wyoming LLC, works only from home and invoices clients worldwide. Those facts usually point away from ECI. A seller who stores inventory in a US warehouse they lease and has a US employee packing orders is in a different position, and should get advice.
Tax treaties can change the result through the permanent establishment rules. Confirm your own position with a tax professional before deciding you have no US tax to pay.
Stay on top of your IRS filings
We file the annual Form 5472 and pro forma 1120 for foreign-owned LLCs.
File Form 5472Questions first? hello@startfleet.io
