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Effectively Connected Income definition for foreign owned LLC?

X

XCD

New member
Mar 27, 2025
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The Moon
#1
We're planning to form a service ecommerce business where people send us their photos, negatives, videotapes, etc for scanning & digitization. My partners and I are all offshore, plan to form a Delaware LLC, and use Stripe & a US bank account to accept payments.

Most of our customers will be based in the US. Once they place an order on our website, we will send them a UPS shipping label to send their media to our warehouse contract in California. The contractor will aggregate about 10 or or shipments, and then forward them together to our scanning & production facilities in China. After it's completed, we'll bulk return ship the media back to the US contractor's warehouse, and then ship individually to each customer via UPS.

We'd have no assets or employees in the USA (besides the bank account and some contractors). So would our income derived from American customers count as ECI and therefore subject to US taxes? My prior research indicates not, but one CPA I spoke with said yes.
 
#3
daniels27 said:
No, it won't be ETBUS. The contactor is an independent agent and has no essential function your business.
Click to expand...
That was my understanding prior to talking to the CPA.

But he claims having a payment gateway (Stripe) and US bank account would render services for US customers to be a US trade and business and therefore subject to US taxes of 21%

He says he worked with many foreign owned LLCs in the past and the only way to avoid US taxes would to be something like a foreign drop shipper that has no US bank account or US independent contractors at all
 
#4
If you are looking for some sort of high risk processor you may have a look here
Kim-OTC

Question Thread 'High Risk Merchant Account at HighRiskPay.com information please?'

Many small businesses in certain sectors struggle to find payment processors that could work with them. Some of these sectors include gambling, cryptocurrencies, pharmaceuticals, adult services, magazines or travel agencies, just to name a few.

Fortunately, there are options out there. If you think about it, why wouldn’t you be allowed to try your entrepreneurship luck? All in all, this is another conversation. When it comes to high risk payment processors, HighRiskPay.com has become an interesting option lately.

Let’s find out why and what you can expect from such a high risk merchant...
  • Like
 
#5
XCD said:
That was my understanding prior to talking to the CPA.
Click to expand...
They are selling fear.

XCD said:
But he claims having a payment gateway (Stripe) and US bank account would render services for US customers to be a US trade and business and therefore subject to US taxes of 21%
Click to expand...
Can confirm that there are many here on OCT with their US bank account and merchant accounts and none of them pays taxes.

XCD said:
He says he worked with many foreign owned LLCs in the past and the only way to avoid US taxes would to be something like a foreign drop shipper that has no US bank account or US independent contractors at all
Click to expand...
At least he could have mentioned taking advantage of a tax treaty.

I previously commented on this topic, see below. In short, half of the CPA will claim it is ETBUS/ECI while the other half tells you otherwise. IRS does not rule on that matter, they also never sued anybody in the past, so you either pay or know that they won't come after you.

D

Post in thread 'Conflicting Infos between CPAs on my US LLC and US Taxes as a Non-Resident Alien (Self-Publishing on Amazon) Should I pay US taxes or not?'

uplana said:
how would you check that on Google?
Click to expand...
https://www.google.com/search?q=fba+engage+in+trade+or+business
ETBUS
https://www.quora.com/As-a-UK-regis...to-pay-any-kind-of-tax-in-US?top_ans=87290762https://www.justanswer.com/tax/by747-morning-just-wondering-foreign-seller-amazon-fba.htmlhttps://nvinc.com/us-tax-responsibilities-for-non-resident-e-commerce-sellers/https://www.andrewmitchel.com/blog/2017_08_belize-ibc-selling-through-amazon-fba...
  • Like
D

Post in thread 'Singapore Sole Proprietorship - Anyone done it?'

dogprince said:
About 30 percent of my customers are American. My understanding is that will make me tax liable in the US (ETOB and ECI). I sell digital software (downloads).
Click to expand...
TheCryptoAnt said:
Selling to Americans (even if 100% of your customer base), doesnt qualify as PE.
Check the IRS website.
Click to expand...
ETBUS=ETOB is not the same concept as PE. You could have no PE but still be considered ETBUS.

Yes, we had this discussion a few times and it is a nightmare as IRS does neither sue nor do any advance ruling. But this also means in return, that they take the free tax of the 50% confused people that believe the 50%...
  • Like
 
#6
redeye said:
If you are looking for some sort of high risk processor you may have a look here
Kim-OTC

Question Thread 'High Risk Merchant Account at HighRiskPay.com information please?'

Many small businesses in certain sectors struggle to find payment processors that could work with them. Some of these sectors include gambling, cryptocurrencies, pharmaceuticals, adult services, magazines or travel agencies, just to name a few.

Fortunately, there are options out there. If you think about it, why wouldn’t you be allowed to try your entrepreneurship luck? All in all, this is another conversation. When it comes to high risk payment processors, HighRiskPay.com has become an interesting option lately.

Let’s find out why and what you can expect from such a high risk merchant...
  • Like
Click to expand...
But why high risk processor. He is digitizing photos.
 
#7
daniels27 said:
They are selling fear.


Can confirm that there are many here on OCT with their US bank account and merchant accounts and none of them pays taxes.


At least he could have mentioned taking advantage of a tax treaty.

I previously commented on this topic, see below. In short, half of the CPA will claim it is ETBUS/ECI while the other half tells you otherwise. IRS does not rule on that matter, they also never sued anybody in the past, so you either pay or know that they won't come after you.

D

Post in thread 'Conflicting Infos between CPAs on my US LLC and US Taxes as a Non-Resident Alien (Self-Publishing on Amazon) Should I pay US taxes or not?'

uplana said:
how would you check that on Google?
Click to expand...
https://www.google.com/search?q=fba+engage+in+trade+or+business
ETBUS
https://www.quora.com/As-a-UK-regis...to-pay-any-kind-of-tax-in-US?top_ans=87290762https://www.justanswer.com/tax/by747-morning-just-wondering-foreign-seller-amazon-fba.htmlhttps://nvinc.com/us-tax-responsibilities-for-non-resident-e-commerce-sellers/https://www.andrewmitchel.com/blog/2017_08_belize-ibc-selling-through-amazon-fba...
  • Like
D

Post in thread 'Singapore Sole Proprietorship - Anyone done it?'

dogprince said:
About 30 percent of my customers are American. My understanding is that will make me tax liable in the US (ETOB and ECI). I sell digital software (downloads).
Click to expand...
TheCryptoAnt said:
Selling to Americans (even if 100% of your customer base), doesnt qualify as PE.
Check the IRS website.
Click to expand...
ETBUS=ETOB is not the same concept as PE. You could have no PE but still be considered ETBUS.

Yes, we had this discussion a few times and it is a nightmare as IRS does neither sue nor do any advance ruling. But this also means in return, that they take the free tax of the 50% confused people that believe the 50%...
  • Like
Click to expand...

Is there any chance you can recommend a good knowledgeable CPA for this kind of matter? Thanks a lot!
 
#8
Stewart Patton
He believes that it is not ECI https://ustax.bz/non-us-entrepreneurs/

Gary W. Carter
I think he is one of those that claims FBA is ECI https://gwcarter.com/

Maybe you can invite both to a cross-talk and then see who brings up the better arguments.

As mentioned, there is no point talking to any CPA or lawyer regarding this as half are convinced one way and the other half the other way. And in most cases, you will find out for free with a simple email. The argumentation is pretty much widely know and may also be given you for free from some. In the end, it is only statistics.

If IRS won't rule nor sue, there is no way to find out. You could pay taxes in 2025 and then hire somebody to claim them back. I think Stewart claims to do this for you and then see if IRS refunds. But they may just refund of courtesy without recognition of a legal obligation etc. and close the matter. As mentioned, IRS takes what is being given and does not ask for more as I guess they are on thin ice with any claim.
 
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#9
There seems to be some disagreement among the several CPAs I asked about this. Suppose I go with one that's more aggressive and says it's not ECI and I dont have to pay US taxes, and a few years later, the IRS audits us & disagrees, what's the worst that can happen?

I assume we have to pay back taxes? But can they hold us civilly (or even criminally) responsible if we've sought good-faith advise from CPAs and had them file the paperwork for us?
 
#10
US registered LLC with customers in the US providing services; the defining factor in these type of operations is usually "where" are the services being provided.

In your case it could be argued that a part of the service is provided in the US. A correct application of tax rules should provide for a partial attribution of profit to the US and apply a witholding tax there. I am not sure if this is done in practice in the US in this type of operations. if you are resident in a Treaty partner country, invoking the treaty should be beneficial. Also operating from a US LLC may not be the best option as any registrations, tax id etc. you may be undertaking points towards a taxable presence. Similar issue is raised by having a local US bank account. Third party independent local contractors are ok. The place of establishment of your website ( hosting ) also should play a role as it points towards the place where the sale is conducted. The payment/card processor place is also relevant here.
 
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#11
XCD said:
There seems to be some disagreement among the several CPAs I asked about this. Suppose I go with one that's more aggressive and says it's not ECI and I dont have to pay US taxes, and a few years later, the IRS audits us & disagrees, what's the worst that can happen?

I assume we have to pay back taxes? But can they hold us civilly (or even criminally) responsible if we've sought good-faith advise from CPAs and had them file the paperwork for us?
Click to expand...
Yes, they will charge you. Make sure to do protective returns each year to limit the amount of years they can go back.

I am not aware of any case that the IRS did audit, let alone criminal case. As @CyprusLawyer101 mentioned, maybe avoid using a US LLC for that. As you have not talked about the treaty, I guess none exists in your case.
 
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