Who is this article written for?
NonAmerican e-commerce sellers are often uncertain about the tax ramifications of doing business in the United States. As online commerce becomes more global, and the barriers to entry for global sales shrinks, there can be increased “tax risk” in several tax jurisdictions for which the business owner is uncertain. Although it is far too complex to summarize all global tax risk, this article will provide you with a few “tax planning” strategies for NonAmerican e-commerce entrepreneurs/business entities looking to sell in the United States.
What types of e-commerce businesses need a US Business Entity?
Our firm always recommends that any and all business owners that are operating in the US, set up a US business entity. It is our opinion that having a US business entity will reduce legal risk and (perhaps more importantly) will provide the opportunity for business structuring to mitigate/reduce tax risk. Below is a more specific list of what types of online sellers should consider forming a US business entity.
- Amazon FBA owners that warehouse inventory in the US
- Foreign Business Owners who would like to operate in USD, including using a US bank account and Merchant Account(s).
- Any foreign owned Business with a US “physical presence”. US Physical Presence includes: inventory, employees -not contractors*, and/or office space
What tax strategies are available to NonAmerican E-Commerce Sellers?
If you are a NonAmerican entity and decide that a US business entity is appropriate for you, we recommend considering one of these following tax planning strategies:
- C-Corp (Blocker)
C-Corps can (likely) block US sourced income from being taxed in your home country. This means that all income generated through the US entity will be taxed by the US at a 21% percent fixed corporate tax rate.
Benefits
The benefit to this strategy is the low corporate tax rate, in comparison to the foreign jurisdiction for which the business owner is located. Additionally the income that is taxed in the US is limited to the income that is generated through the US C-Corporation.
Drawbacks
The main drawback to this tax planning strategy is that there is the risk of “double taxation” of income. The owner of a C-Corporation is subject to an additional “dividend tax” for any dividend distributions taken from the business. In other words, if the Foreign Owner withdraws funds from the business, they would likely incur a dividend tax in their foreign jurisdiction and potentially have withholding tax implications in the US. There are ways to strategize around this limitation which must be considered prior to reorganization of the tax structure. For this reason, we highly recommend that you do not implement this type of structure without working with a firm that is equipt to assist you in structuring this correctly.
Who does this tax plan make sense for?
The C-Corp tax planning strategy makes sense for foreign owned businesses that either
- have a US physical presence (employees, inventory, etc) or
- have owners who are subject to tax in high tax jurisdictions, such as many European countries
Filing Requirements?
C-Corporations are required to file IRS form 1120 each year, with a filing deadline of April 15th.
- Disregarded Entity
US LLCs that are 100% owned are generally considered “disregarded entities” for US tax purposes. Furthermore, 100% foreign owned US LLCs that do not generate “effectively connected income” generally are not subject to income taxes in the US. This means that if you are a 100% foreign owned business, with no US physical presence (such as a dropshipper living in Europe), you are not subject to income taxes in the US.
Benefits
Assuming that the business truly has no “effectively connected income”, there are no income taxes payable to the IRS. Accordingly, all tax return filings to the IRS are “informational” and don’t require the payment of taxes.
Drawbacks
The income tax rate/regime of the local jurisdiction for which the foreign business owner is taxed, is the rate/regime for how the US entity income will be taxed. For example, lets say there is a US LLC generating $300,000 of income, and is owned by a French Corporation. The income from the US LLC will be taxed in the same manner for which the French Corporation is taxed.
Who does this make sense for?
This tax planning strategy makes sense for business owners that have no US “effectively connected income” (including physical presence) AND have a low tax rate in the local country for which the foreign owner resides. This strategy also makes sense for smaller scale business owners (less than $3M in annual sales) that are seeking a simpler tax structure.
Filing Requirements
The owner of the 100% foreign owned LLC is required to file form 5472 by April 15 of each year.
About our Firm
The name says it all….
We provide multi-channel e-commerce and seller marketplace accounting. Whether you sell on Shopify, Amazon, Walmart, Etsy, WooCommerce, Big Commerce or any culmination of them, we are a full service accounting firm that can help you achieve, reduced tax exposure and increased profits! We work with both E-Commerce Entrepreneurs as well as more established brands. Our core services include: tax planning, tax compliance, sales tax compliance, bookkeeping, CFO services and much much more!
About the Founder:
Chris founded the E-commerce accountants in 2019 which specializes in tax, accounting, and business structuring for eCommerce companies. Chris has worked with some of the most high profile and influential individuals and businesses in the eCommerce space.
Prior to the start of his firm, Chris spent six and a half years with Ernst & Young specializing in tax and accounting for retail consumer products and service companies. During this time, Chris worked entirely with multinational businesses (both public and private) providing services including: business structuring, accounting consulting, auditing, tax compliance, and tax planning.
Chris graduated from the University at Albany and is a New York State Certified Public Accountant.