Operating a business outside the U.S. does not exempt one from American taxation. This is especially true for foreign individuals or entities that earn Effectively Connected Income (ECI) with a U.S. trade or business. Tax obligations in such cases are complex, multi-layered, and often include reporting duties regardless of the taxpayer's residence or place of incorporation. Below is a structured overview of key aspects foreign persons with ECI should consider (Based on webinar materials).
Foreign individuals receiving ECI in the U.S. are required to make quarterly estimated tax payments of 37% based on net income. This is not a final amount — by June 15 of the following year, Form 1040NR must be filed, allowing for deductions, exemptions, and tax credits. If the actual tax liability is lower, the IRS will refund the overpaid amount.
This pay-as-you-go system is standard in the U.S.: the IRS expects taxes to be paid throughout the year, not only at year-end. For foreigners, this creates added risks — including potential penalties for late estimated payments.
A foreign company with ECI is subject to the U.S. corporate income tax of 21%. However, if profits are repatriated abroad, the so-called branch profits tax applies — an additional tax on the outbound flow of profits, which can reach 30%. The rate depends on whether a tax treaty exists between the company's country of incorporation and the U.S.
For example:
As a result, the total tax burden can exceed 45%, questioning the efficiency of such a structure without careful tax planning.
The U.S. allows the use of so-called transparent or pass-through structures. These are legal entities where taxes are not paid at the entity level but passed through to the owners in proportion to their share of income.
Common forms include:
Despite their flexibility, pass-through structures may create hybrid mismatches when one jurisdiction treats an entity as transparent and another does not. For example, an LLC is treated as a partnership in the U.S. but may be regarded as a separate legal entity elsewhere. These mismatches previously offered tax arbitrage opportunities, but are now under heightened scrutiny by both the IRS and European tax authorities.
The key factor in determining ECI is the connection between income and U.S. activity. It may be established by:
Even if a business operates through an offshore LLC or partnership, U.S. presence automatically “connects” the income to ECI. This is especially important for companies in IT, outsourcing, consulting, and startups with global clients.
ECI entails not only taxation but mandatory reporting.
For individuals:
For corporations:
For partnerships:
Failure to comply with reporting requirements may lead to penalties, reputational damage, frozen bank accounts, and payment delays.
The IRS is evolving as fast as the tech industry. Today, the agency actively uses artificial intelligence tools to identify companies that, while formally foreign, effectively conduct business in the U.S.
Particular attention is given to IT, advertising, consulting, and influencer marketing businesses. Even the suspicion that someone in the U.S. is acting on behalf of a foreign company may trigger IRS investigations — including gathering evidence from clients, email records, and contracts.
The U.S. tax system is complex but predictable. Foreigners who navigate it wisely can operate in the U.S. efficiently — without excessive costs or unnecessary risks.
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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Violetta Loseva
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