US tax for an owner abroad · A term for founders abroad
What is effectively connected income?
ECI. Income connected with a US trade or business, which the US taxes a foreign person on at ordinary rates; pay for work done abroad usually isn't ECI.
Checked against the IRS's instructions and the states' own rules. Reviewed by Saais Patel, compliance reviewer.
Term 29 of 105 in the glossary, filed under E.IRS: Publication 519, tax guide for aliens
Effectively connected income, for a founder abroad.
The US taxes a foreign person, including the owner of a foreign-owned LLC, on income effectively connected with a US trade or business, at the same rates as a US person, after deductions. Whether there's a US trade or business depends on the facts, such as an office, employees, a dependent agent or inventory sold from the US.
Services performed outside the US are foreign-source and not effectively connected, which is why most foreign-owned service companies owe no US income tax. A non-resident with ECI files Form 1040-NR.
Sources: IRS: Publication 519, tax guide for aliens.
Read next · guide · 6 minDo non-resident LLC owners pay US tax? The trade-or-business test, plainlyWhat founders ask next.
- Is income from US clients effectively connected income?
- Not because the clients are American. What matters is where the work is done and whether you have a US trade or business. Work done abroad, with no US office or staff, usually isn't ECI.
- How is ECI different from FDAP income?
- ECI is business income, taxed at normal rates after deductions on a return. FDAP income is passive US income, such as royalties, taxed by 30% withholding at source.
03 · See also
- US tax for an owner abroadUS trade or businessRegular, continuous business activity in the US that makes a foreign person's connected income taxable there; decided by facts, not where you formed.Read the term
- US tax for an owner abroadFDAP incomeFixed or periodic US-source income such as dividends, interest and royalties, withheld on at 30% or a treaty rate when paid to a foreign person.Read the term
- US tax for an owner abroadPass-through taxationTax treatment where a company pays no income tax itself and its profit is taxed to its owners, as with an LLC or a partnership.Read the term
- The EIN and IRS formsForm 1040-NRThe US tax return for a non-resident individual with US-taxable income, such as income from a US trade or business; most foreign LLC owners don't owe one.Read the term
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