International Entrepreneurs

With few exceptions, international entrepreneurs are welcome to open business entities in the United States. However, there are some additional reporting requirements. The penalties for failing to comply are pretty severe so it is important to be on top of this. Let's start by defining who is considered a foreign business owner. For IRS purposes, a non-US citizen is considered a US tax resident if he or she meets one of the following tests:

  1. Green Card

  2. Substantial Presence

You had a substantial presence if you were physically present in the United States

  • 31 days during the current year, and

  • 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:

    • All the days you were present in the current year, and

    • 1/3 of the days you were present in the first year before the current year, and

    • 1/6 of the days you were present in the second year before the current year.

You can exclude days present in one of the following visa statuses A, G, J, Q, F, M. Anyone who does not meet this test is considered a non-resident for tax purposes or simply a foreign tax resident. Please note that residency for immigration purposes has nothing to do with tax residence.

The second important concept is to define a US sourced income, since foreign residents only pay US taxes from income sourced in the US.

Source of Income

Item of Income Factor Determining the Source
Salaries, wages, other compensation Where work is performed
Business income from services Where services are performed
Business income from sale of purchased inventory Where inventory is sold
Business income from sale of produced inventory Where inventory is produced
Interest The residence of the payer
Dividends Whether paid by a US or foreign corporation
Rents Location of the property
Royalties from natural resources Location of the property
Royalties from patents, copyrights, etc. Where property is used
Sale of real property Location of property

Foreign-Owned LLC

Foreign-owned single-member LLC is a disregarded entity for US tax purposes and unless it has a US sourced income it is not subject to US taxation. Refer to the table above to determine if the LLC had a US sourced income. For example, if a foreign owned LLC performs services for a US company and the services are performed outside of the US, it is not subject to US tax. The registration process is the same as for an LLC owned by a US resident with one additional detail. Within 45 days from registration or acquisition form BE-13 must be filed. Refer to BE-13 page for instructions. Reporting is indeed different for foreign owned LLCs. By April 15th it needs to file from 5472 with IRS. Refer to 5472 page for instructions. Every 5 years (next one being May 31 2028) it needs to file form BE-12. Refer to BE-12 page for instructions.

Foreign-Owned General Partnership

This includes general partnerships and multi-member LLCs. For each partner that is a foreign tax resident the partnership must make a mandatory tax withholding from any distributions of income that are US sourced. For foreign individuals, the rate is 37% and for corporations it is 21%. For example, Kelsi and K LLC has 4 members. 1 is a resident of Italy. At the end of the year from $100,000 net income sourced in the US $25,000 was distributed to her. Since she is a foreign partner a mandatory $9,250 was withheld from the distribution and remitted to IRS. For each foreign partner that owns 10% or more of the partnership the form BE-13 must be filed within 45 days from when the ownership began. Under same ownership conditions (10%), the partnership must file BE-12 every 5 years (May 31, 2028, is the next one). For each foreign partner that owns 25% or more of the partnership the form 5472 must be filed by April 15th. All the filing requirements are in addition to and not instead of the other tax filing requirements.

Foreign-Owned Corporation

Unlike LLC, corporations are not disregarded for tax purposes, meaning that even when owned by foreign persons they are considered domestic corporations, and their entire income is taxed in the US at the same 21% corporate rate as if it was owned by US persons. However, any payments to foreign owners such as dividends or salary are taxable based on the Income source table. For example, the salary paid to a foreign shareholder is not subject to US tax if the shareholder worked abroad (not counting temporary presences). On the other hand, dividend payments to foreign shareholders are subject to 30% tax and the corporation must make a mandatory withholding. The corporation must file form BE-13 if one shareholder owns 10% or more of the corporation within 45 days that the ownership began. Under same ownership conditions (10%), the corporation must file BE-12 every 5 years (May 31, 2028, is the next one). For each foreign shareholder that owns 25% or more of the corporation the form 5472 must be filed by April 15th. All the filing requirements are in addition to and not instead of the other tax filing requirements.

Tax Calendar

Form / Entity Type Foreign-Owned Single-Member LLC General Partnership incl Multi-Member LLC with Foreign Members C Corporation with Foreign Shareholder
5472 Required, Due April 15th Required if a foreign member / partner owns 25% or more. Due on April 15th Required for each foreign shareholder that owns 25% or more. Due on April 15th
Federal Tax Return required only if it had a US sourced income. 1040NR due on April 15th Required if it had US sourced income. Form 1065 due on March 15th Required. 1120 Form is due on April 15th. Taxed on global income.
BE-12 Required. Due June 30 2028 Required if at least 1 foreign partner ownes 10% or more. Due on June 30 2028 Required for each shareholder that owns 10% or more. Due on June 30 2028
BE-13 Required. Due 45 days from ownership / aquisition Required if at least 1 foreign partner ownes 10% or more. Due 45 days from ownership / aquisition Required for each shareholder that owns 10% or more. Due 45 days from ownership / aquisition