More and more foreign companies, including Ukrainian ones, are targeting the U.S. market — selling services, licensing software, or opening subsidiaries in the U.S. But even without a physical office on U.S. soil, such businesses may fall under the jurisdiction of the Internal Revenue Service (IRS). Two key concepts explain how: Effectively Connected Income (ECI) and Fixed, Determinable, Annual or Periodical Income (FDAP).
You can find more details in the webinar recording. Below are the key takeaways and principles.
ECI is income that is "effectively connected" with the conduct of a trade or business in the U.S. This doesn't necessarily mean a physical presence: regular business trips, participation in negotiations, or having representatives acting on behalf of the company may suffice.
Example: A Ukrainian IT company sets up an LLC in Delaware and receives $500,000 annually from U.S. clients. If the founder or employees regularly visit the U.S., the IRS may consider the income as ECI — which means the company must report its profits and pay taxes in the U.S., even if the core operations happen elsewhere.
It’s important to note that ECI rules are not strictly defined — the interpretation depends on the totality of the circumstances. Even being in the U.S. for less than 90 days per year or earning under $3,000 doesn't automatically exempt a company from taxes, as those thresholds are outdated in the current economic context.
If the activity doesn’t qualify as ECI, the IRS may classify the income as FDAP — Fixed, Determinable, Annual, or Periodical income. This includes royalties, dividends, interest, rent, licenses, and more. By default, FDAP income is subject to a flat 30% gross tax, withheld at the source.
This rate can only be reduced under an active tax treaty (e.g., between the U.S. and Ukraine — down to 10%).
Risky case: A Ukrainian company licenses software to a U.S. client via its LLC. Even without any physical presence in the U.S., the IRS may classify the royalties as FDAP income and apply a 30% tax to the full amount — with no deductions for expenses.
Regardless of whether a tax obligation arises, businesses must consider indirect risks:
In other words, even minimal engagement with the U.S. can make a business "visible" to the IRS, triggering documentation requirements.
There are proven strategies for optimization:
Businesses can choose between "transparent" structures (like LLCs or partnerships), where taxes are paid by the owners, and "opaque" ones (like C-Corporations), where the company pays corporate income tax.
LLCs remain a popular choice for IT firms, startups, and freelancers working with foreign clients — offering flexibility and the potential to avoid double taxation.
But there are exceptions. Some global platforms require a U.S. Tax Residency Certificate. An LLC fully owned by non-U.S. persons cannot obtain this document. In one case, a company had to set up a C-Corp with 1% ownership by a U.S. resident to obtain the necessary certificate.
C-Corp is suitable for:
However, a C-Corp pays 21% corporate income tax and may incur extra costs for accounting and reporting.
There’s also the option of tax-free conversion from LLC to C-Corp, offering strategic flexibility — start simple, and scale up when needed.
Overall, the "start with an LLC — convert to C-Corp if needed" strategy remains the most versatile.
The IRS keeps a close eye on cross-border businesses, and interpretations of ECI and FDAP depend more on substance than on form. Ukrainian companies working with U.S. clients should consider tax implications early and consult experienced advisors to build an optimal structure.
How to Pay Taxes in the USA Correctly? AVITAR & iFindTaxPro
How to Pay Taxes in the USA Correctly? AVITAR & iFindTaxPro (Part II)
How to Pay Taxes in the USA Correctly? AVITAR & iFindTaxPro (Part III)
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Contact us: business@avitar.legal
Violetta Loseva
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