US Tax Obligations for Foreign LLC Owners
Foreign-owned US LLCs have specific tax obligations. Understanding these requirements helps you stay compliant and avoid penalties.
International tax is complex and penalties are severe. This guide provides an overview, but you should work with a tax professional familiar with both US and your home country tax laws.
Overview
As a foreign owner of a US LLC, your tax obligations depend on:
- Whether you're engaged in US trade or business
- The type of income your LLC earns
- Your home country's tax laws
- Tax treaty benefits (if any)
A key concept: Single-member foreign-owned LLCs are treated as "disregarded entities" for US tax purposes. The LLC isn't taxed, but you still have reporting requirements.
Types of Income
Effectively Connected Income (ECI)
Income connected to a US trade or business is taxed at regular US income tax rates. This includes:
- Income from services performed in the US
- Income from US-based business operations
- Certain US real estate income
If you're running a business entirely from abroad with no US presence, you may have little or no ECI.
FDAP (Fixed, Determinable, Annual, Periodic)
Passive income like interest, dividends, rents, and royalties from US sources. Subject to 30% withholding tax (may be reduced by tax treaties).
Foreign Source Income
Income from services performed outside the US for non-US clients is generally not subject to US tax, even if paid through your US LLC.
If you're a freelancer living abroad, providing services to US clients from your home country, this income is generally NOT considered ECI and may not be subject to US tax. However, you still have reporting obligations.
Form 5472: The Critical Requirement
All foreign-owned single-member LLCs must file Form 5472 annually, even if no tax is due. This is not optional.
What Is Form 5472?
Form 5472 reports transactions between your LLC and its foreign owner. It's filed with a pro forma Form 1120 (even though you're not taxed as a corporation).
What's Reported
- Money you contributed to the LLC
- Money you took out of the LLC
- Payments to or from related parties
- Loans between you and the LLC
Penalty for Non-Filing
$25,000 per form, per year.
This is one of the harshest penalties in the tax code. Even if you owe no tax, failing to file Form 5472 can result in massive penalties.
Due Date
Form 5472 is due by April 15 (or the extended deadline of October 15 if you file an extension).
Do not skip Form 5472. The $25,000 penalty applies even if your LLC had no income. If you're a foreign-owned single-member LLC, you must file this form every year.
Avoiding Double Taxation
Your home country may tax your worldwide income, including US LLC income. To avoid paying tax twice:
Tax Treaties
The US has tax treaties with many countries that:
- Reduce withholding rates on certain income
- Establish which country has taxing rights
- Provide mechanisms for resolving disputes
Foreign Tax Credits
If you pay US tax, you can often claim a credit against your home country taxes (or vice versa). This prevents the same income from being taxed twice.
Proper Structuring
How you structure your business can affect tax treatment in both countries. Work with professionals who understand both systems.
Best Practices
- File Form 5472 every year: Even if you owe no tax, this filing is mandatory
- Keep good records: Document all transactions between you and your LLC
- Separate finances: Keep personal and business accounts separate
- Get professional help: Work with a CPA familiar with international tax
- Understand your home country rules: Know how your country taxes foreign LLC income
- Meet all deadlines: Set reminders for US and home country filings
Many international founders work with US-based CPAs who specialize in foreign-owned LLCs. The cost of professional help is far less than the penalties for non-compliance.
Frequently Asked Questions
Frequently Asked Questions
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