Hi Dan,
1) Is any of my income considered US-source and thus IRS taxable?
The income you make as a nonresident alien outside the US is
foreign-source income and is not taxable (even if all of your
customers are in the US). "U.S. Source Income" is income derived from
services performed in the U.S. (it's not where your customers are
located).
"Limited Liability Companies and partnerships that carry on no
business in the US and derive no income from any sources within the US
do not need to file a US federal tax return. The US can thus be a
conduit for foreign business or foreign investments - the LLC allows
the foreign business or foreign investor to use many of the United
States' tax treaties. However, an LLC that elects to be treated as a
corporation does need to file a return.
Foreign owners of a domestic LLC do not pay income tax on the LLC?s
foreign source export income except under certain circumstances. If
the foreign person?s LLC does not have a US office or an agent in the
US, it is unlikely that foreign source income will be taxed as US
income. If there is a US office, then by and large the activities of
the US office will not be considered to be a material factor in the
realization of income, gain, or loss, unless the US office provides a
significant contribution to, by being an essential economic element
in, the realization of the income, gain, or loss. An administrative
office in the US can pay expenses, deposit income and perform
accounting activities. These activities will not cause export income
to be taxed by the US taxing authorities."
(Brain G. Dooley & Associates, Inc Certified Public Accountants)
http://www.lowtax.net/lowtax/html/offon/usa_new/usacos1.html
"Nonresident aliens, for tax purposes, unlike U.S. citizens and
residents, are only subject to tax on income that is considered U.S.
Source Income by the IRS. Foreign Source Income received by
nonresident aliens is not subject to U.S. taxation.
* U.S. Source Income - income is generally considered U.S. Source if
the location of the activity for which the payment is being made is in
the U.S.
* Foreign Source Income - income is generally considered foreign
source if the location of the activity for which the payment is being
made is outside the U.S."
http://vpf-web.harvard.edu/ofs/tax_services/emp_pay_sou.shtml
US TAX FOR ALIENS: Publication 519: US Tax Guide for Aliens:
Chapter 2, page 11:
"A nonresident alien usually is subject to U.S. income tax only on
U.S. source income."
Table 2-1, page 11:
Summary of Source Rules for Income of Nonresident:
A. Factor Determining Source:
1. Salaries, wages, other compensation: Where services performed
2. Business income: Personal services: Where services performed
Chapter 2, page 12:
"All wages and any other compensation for services performed in the
United States are considered to be from sources in the United States."
"If your compensation is for personal services performed both inside
and outside the United States, you must figure the amount of income
that is for services performed in the United States."
http://www.irs.gov/pub/irs-pdf/p519.pdf
2) Is any of my income liable to Delaware state income tax, or another
state's income tax?
No, only companies transacting business in Delaware have to pay state tax.
There is no Delaware corporate income tax for corporations that are
formed in Delaware so long as they do not transact business in
Delaware."
(Delaware Intercorp is a registered agent for Delaware Corporations
and Limited Liability Companies.)
http://www.delawareintercorp.com/why.htm
Where Should You Incorporate?
Highlights of benefits to incorporating in Delaware include:
# Low cost incorporation fees;
# No state corporation income tax for Delaware corporations not
operating in Delaware;
# No name or address disclosure requirement for the initial board of directors;
# One person may hold all corporate offices;
# The corporation must have a registered agent in Delaware, but not a
business office; and
# Claims relating to the corporation will be heard by the Delaware
http://www.allbusiness.com/articles/content/article.asp?ID=590&CenterID=31&CatID=1799
Additional Links of Interest
US as a Tax Haven Country
"Foreigners may use the US as a tax haven jurisdiction if they operate
in the United States. Nevada and Wyoming are among the leading tax
haven states in the US. Foreigners are not required to file any state
or federal tax returns or pay any US taxes as long as they do not
operate in the US."
http://www.corporateservicecenter.com/LLC/LLClforeignowned.htm
"Non US persons are only taxed on US source income or income connected
with the conduct of a US trade or business. If the LLC earns only
income which falls outside this definition and the members of the LLC
are non US persons with no US presence then no tax would be payable
either by the LLC or by its members."
http://www.ujoffshore.com/enghtml/services/incorp_jurisd_delawllc.asp
"However, we have found that a more significant benefit arises for
non-resident aliens utilising LLC's. If the LLC is owned entirely by
non- resident aliens, no LLC business is conducted in the US and all
its income is foreign source income, then no tax need be paid to the
IRS. The US, in this case, becomes a tax haven for non-resident
aliens."
http://www.consumoffshore.com/english/corpusa/llcintro.html#usllc
I hope that is clear but please note that this is meant for
information purposes only and it would be best to consult an
accountant for professional advise. If you have any questions, please
post a clarification request *before* closing/rating my answer and
I'll be happy to reply.
Thank you,
hummer
I was able to use my own extensive research on the subject along with
searching the IRS website. |
Request for Answer Clarification by
danm-ga
on
13 May 2005 09:13 PDT
Thanks for the answer.
Are you sure that having/renting space on webservers in US/Delaware
does not create US/Delaware nexus? Or worse, that having webservers in
California does not create California nexus? In particular, the
Delaware Revenue Dept link listed in my original question strongly
suggests that having a server in a state creates nexus with that
state.
I'm also wondering whether opening a US account for the company might
create nexus, but I guess that wasn't in my original question.
I'm having a difficult time getting straight answers to these
questions. Online incorporators and "asset protection" sites say
things that favor their business without offering any proof, which
makes me skeptical.
|
Clarification of Answer by
hummer-ga
on
13 May 2005 10:16 PDT
Hi again, Dan,
Ah yes, I see, I seem to have misunderstood your question and started
off along the wrong path. I'll research this further for you, but if
you don't mind, could you let me know why you are setting up the LLC?
Also, where are you located?
In the meantime, I'll post this link (I'm unable to copy any parts of it).
http://www.atrium-incorporators.com/Taxation.htm
Till later,
hummer
|
Request for Answer Clarification by
danm-ga
on
13 May 2005 11:48 PDT
Hi Hummer,
I am located in Europe (though I don't think this should affect the matter).
I am setting up an LLC because that gets rid of one layer of taxation
and record-keeping complexity compared to a corporation. I would stay
away from a sole-proprietorship or a non-american entity (mostly for
image reasons).
I may consider a corporation if that has advantages. I may also
reconsider Delaware, since it has both income tax and sales tax
(disguised as "gross receipts tax").
Thanks for the link; no need to copy & paste any parts of it, I will read it myself.
|
Clarification of Answer by
hummer-ga
on
13 May 2005 12:35 PDT
Ok Dan, let's see if we can't put this one to bed for you. Remember,
there is no limit to the number of clarifications you can post and I
don't mind seeing this through to the end.
1. I asked about where you are located because of tax treaties between
the U.S. and other countries.
2. State tax vs federal income tax. A few things here just to be sure
you understand.
Fed. income tax: as I explained in my answer, you will not have to
file income tax as a non-resident alien owning a LLC in Delaware.
State tax: the only time state tax is due, is when a customer buys a
product in the state where the business is located (nexus).
Examples:
You have a store in California. Someone comes into your store and buys
your product. You will charge state tax.
You have a store in California. Someone is in Vermont and orders your
product via the phone. You will not charge state tax.
So even if your company establishes nexus in one state, you would only
have to charge state tax from customers of that state.
3. California - you're safe from nexus here in regards to the server.
American Bar Association:
"Whatever bases they use to establish nexus, several states expressly
deem certain Net-related activities insufficient to establish nexus
with the state. California, for example, has established that nexus is
not established by a remote seller maintaining a Web site on a
computer server located in the state, having purchase orders taken by
an in-state Internet Service Provider, having limited attendance at
in-state trade-shows, or having contracts with in-state, unrelated
third-party contractors to handle repair and warranty services. Cal.
Code Regs. tit. 18, § 1684(a)."
http://www.abanet.org/buslaw/blt/2003-03-04/trelease.html
4. Other states - see the ABA article.
5. LLCs in the US
My question was really why do you want to form anything in the states,
LLC or otherwise. I asked because some people think that they need
to do it in order to sell products legally in the states. That isn't
true, and if you've no other reason to do it, then don't. Without the
LLC, you can sell all you want in the States, worry-free as far as tax
goes. If you'd like to discuss this further, let me know (I know the
subject well from personal experience).
I'll close for now and wait for your reply,
hummer
|
Request for Answer Clarification by
danm-ga
on
13 May 2005 13:48 PDT
Thanks for the two excellent articles. Based on the ABA article, it
seems that, regardless of the location of my e-business, a boat-load
of states would require me to collect sales tax for sales to their
residents. But that would apply to a non-US company as well, wouldn't
it?
Regarding federal taxes, a local advisor has just told me that opening
a US bank account establishes nexus in the US. The material on
lowtax.net seems more convincing, but I will double-check with another
CPA sometime.
I am based in Romania; one treaty I'm aware of is online at
www.fifoost.org/rumaenien/steuern/dba_us-rum/index.php
It does seem difficult to properly set up a US e-business. I'm worried
not so much about the tax money, but about the fact that I might break
a myriad of laws without even realizing it.
I know that I don't need a US company to sell in the States; I just
feel that an American company would have a good image with most of my
potential customers (besides sales of goods, services and information
over the internet, I expect to offer software consulting services).
By "discussing further", I assume you meant here on this thread,
right? Would you care to recommend another place of incorporation
besides the US? I don't want to take advantage of you, since I feel
you have already done a very good job, but I do wish I could keep in
touch with you somehow, since you seem to be very well informed.
-- Dan
|
Clarification of Answer by
hummer-ga
on
13 May 2005 14:07 PDT
Hi Dan,
Just a quick note as it is dinner time here.
By "discussing further", I assume you meant here on this thread,
right?
Yes, posting clarifications here is just fine, even after you close
(rate) the question, you will be able to post clarifications.
Give me some time to think this through, your new information is very helpful.
hummer
|
Clarification of Answer by
hummer-ga
on
14 May 2005 07:36 PDT
Hi Dan,
1. Thanks for the two excellent articles. Based on the ABA article, it
seems that, regardless of the location of my e-business, a boat-load
of states would require me to collect sales tax for sales to their
residents.
No, that is the point of nexus. Only States where your business has
some kind of presence would you need to collect sales tax, and then
only from customers in that state. Here are two more examples.
You set up an LLC in Texas and it is clear that you have a presence
there (office, warehouse, etc). That is the only state where you have
an office or warehouse.
a. A customer in Texas orders your product over the internet. You
must collect Texas sales tax.
b. A customer in New Jersey orders your product over the internet.
You will not collect any sales tax (either NJ or Texas).
2. But that would apply to a non-US company as well, wouldn't it?
Sales tax only applies to businesses that have nexus in a particular state.
3. Regarding federal taxes, a local advisor has just told me that opening
a US bank account establishes nexus in the US. The material on
lowtax.net seems more convincing, but I will double-check with another
CPA sometime.
Yes, you are going to establish a business in Delaware.
4. I am based in Romania; one treaty I'm aware of is online at
www.fifoost.org/rumaenien/steuern/dba_us-rum/index.php
Yes, that's the one. Here it is on the IRS website:
http://www.irs.gov/businesses/corporations/article/0,,id=96739,00.html
5. It does seem difficult to properly set up a US e-business. I'm worried
not so much about the tax money, but about the fact that I might break
a myriad of laws without even realizing it.
If you use a service like Harvard, you should be fine.
Harvard ($450 + $50 per year)
http://www.delawareinc.com/special/details.cfm?id=1013
5. I know that I don't need a US company to sell in the States; I just
feel that an American company would have a good image with most of my
potential customers (besides sales of goods, services and information
over the internet, I expect to offer software consulting services).
Yes, I understand. It's not as difficult as it may seem and if you
seek professional help, everything should be fine. Here are some links
to help you understand the ins and outs of a Delaware LLC.
FEDERAL TAX
A Single Member Delaware LLC won't have to file a federal income tax
return because it will be a "disregarded entity" so all profits will
be shifted to you. You then you will declare your personal income in
Romania (the tax treaty between Romania and the U.S. is there to
prevent having to pay income tax on the same income in two different
countries).
GROSS RECEIPTS TAXES DELAWARE
"Unless otherwise specified by statute, the term "gross receipts"
comprises the total receipts of a business received from goods sold
and services rendered in the State."
http://www.state.de.us/revenue/services/Business_Tax/Step4.shtml
NEXUS / CALIFORNIA / SALES TAX
The server location does not establish nexus in California so you
won't have to collect sales tax there.
American Bar Association:
"California, for example, has established that nexus is not
established by a remote seller maintaining a Web site on a computer
server located in the state, having purchase orders taken by an
in-state Internet Service Provider... Cal. Code Regs. tit. 18, §
1684(a)."
http://www.abanet.org/buslaw/blt/2003-03-04/trelease.html
>>> DELAWARE Department of State: Division of Corporations:
NEXUS QUESTIONAIRE
http://www.state.de.us/revenue/services/Nex.shtml
FORMS & CERTIFICATES
The Delaware Division of Corporations has all forms available in our
"How to incorporate" packet available online in PDF format.
http://www.state.de.us/corp/incbook.pdf
PROCESSING FEES
http://www.state.de.us/corp/expserv.shtml
STATE TAX
"All Limited Partnerships, Limited Liability Companies and General
Partnerships formed in the State of Delaware are required to pay an
annual tax of $200.00. Taxes for these entities are to be received no
later that June 1st of each year."
http://www.state.de.us/corp/frtax.shtml
LIST OF REGISTERED AGENTS
http://www.state.de.us/corp/agents/agts.shtml
MORE LINKS
http://www.state.de.us/revenue/services/BusServices.shtml
6. Would you care to recommend another place of incorporation besides the US?
Good questions but to tell you the truth, I've never researched
anywhere but the US.
Cheers!
hummer
|
Request for Answer Clarification by
danm-ga
on
14 May 2005 08:42 PDT
Thanks hummer. The point I was trying to make (based on the ABA
article) was that, in e-commerce, you don't really know where your
servers are. They might be in multiple states. California has
clarified that servers don't imply nexus, but other states have not.
Worse, "a remote seller establishes nexus with Texas if it licenses
either off-the-shelf or custom software to a Texas customer". So if
your customers are from all over the US, several states might claim
nexus. Therefore, I will need to collect sales tax for several states;
the process of figuring out the requirements for each state sounds
painful.
Come to think of it, I suspect that if a state claims nexus over your
business, you are required to register with that state as a foreign
corporation. More fun.
I don't see why a non-US company would be different from a US company
in this respect; the states would still claim nexus under the same
statutes.
> Yes, you are going to establish a business in Delaware.
The issue was whether opening a US bank account for the company makes
the profits US-source or not, for IRS purposes. Like I said, I trust
the material on lowtax.net at this point.
The Delaware nexus questionnaire is very explicit. Too bad it doesn't
say how the decision made, based on the answers to the 57 questions.
Regarding Gross Receipt Taxes, it sound like a pretty bad deal (it's a
percentage of revenues, not profits).
I am quite familiar with the online incorporators; I have searched the
net and I have gone over the list of registered agents that each
state's Secretary of State maintains, exchanging e-mails with many of
them. Thanks for the links anyway.
I will rate the answer, since I feel you have done a very good job.
Whether or not you want to add anything else is up to you.
Best regards,
Dan
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Clarification of Answer by
hummer-ga
on
14 May 2005 10:38 PDT
Thank you for your thank you, Dan, nice rating and tip, I appreciate
them all. I understand what you are saying and probably can't offer
more than I already have.
The issue was whether opening a US bank account for the company makes
the profits US-source or not, for IRS purposes.
I don't believe the IRS considers a bank account as US source income,
they are more concerned about where the service/activity/work is being
performed. If the question came up, I believe it would be more about
the act of downloading software rather than your bank account. If you
were mailing out your software on CDs from Romania, clearly it would
not be considered US source income. However, downloading the software
is fuzzier (e.g., with nothing to ship, what activity are you
performing in Romania). Anyway, having a US bank account has nothing
to do with US source income, it's just a place to deposit money, it's
not the activity of the business.
It has been nice working with you and I wish you well in your
business. If I happen to come across something in my cyberspace
travels that I think may help you, I'll be sure to post it.
hummer
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