I Live Abroad With a US LLC, Do I Owe US Tax? (The ECI Question)

There is a lot of confusing advice online, so here it is plainly. Two questions decide everything, and the rest of this article answers them in order.

Are you a non-resident alien?

This analysis only works for a non-resident alien. You are one if all three are true:

• You are not a US citizen.
• You are not a US green-card holder.
• You are not in the US enough to be a resident under the substantial presence test [IRC §7701(b)].

If any one of those fails, stop here. A US citizen who lives abroad is still taxed on worldwide income, so a US LLC does not produce a $0 result for them (that rule is its own article: internal link: Day 23). Everywhere below, "owner" means non-resident alien owner.

Does a US LLC with US customers mean US tax?

No, not by itself. US tax for a non-resident alien turns on one thing: ECI, income effectively connected with a US trade or business [IRC §864(c)]. The LLC is a pass-through, so the tax is decided at your level:

• Single-member LLC: disregarded, looked straight through to you [Treas. Reg. §301.7701-3].
• Multi-member LLC: a partnership; looked through to each partner, who is taxed only on their share of ECI [IRC §875].

The test is where your business activity happens, your people, your office, your presence, not where your customers are. No US trade or business means no ECI means no US income tax on those profits. The rate point matters too: ECI is taxed at individual graduated rates, never the 21% corporate rate, which applies only to C corporations [IRC §11, §871(b)].

The three sourcing rules that decide ECI

Whether income is US-source, and so likely ECI, comes down to which of these you are doing:

• Services: place of performance. Service income is sourced where the work is done. Work performed outside the US is foreign-source, even if every client is American [IRC §§861(a)(3), 862(a)(3)].
• Inventory you produce: place of production. If you make the goods, the production income is sourced where you produce them. Produce abroad and merely warehouse in the US for fulfillment, and a US warehouse alone does not create US-source production income [IRC §863(b); Treas. Reg. §1.863-3].
• Inventory you buy and resell: passage of title. If you buy finished goods and resell them, the income follows where title and risk of loss pass to the buyer. Title passing inside the US makes the income US-source, and a US warehouse is exactly where title tends to pass domestically [IRC §§861(a)(6), 862(a)(6); Treas. Reg. §1.861-7].

So the famous "warehousing in the US" warning is only half a rule. For a producer, a US warehouse is usually fine. For a reseller, where title passes is the whole game.

The other ECI triggers

Beyond sourcing, these facts create a US trade or business and pull income into ECI:

• Dependent agents: people in the US who work substantially for you and habitually close business on your behalf.
• A US office or fixed place of business, including one your agents keep for you.
• Your own US presence: extended working stays can create a US trade or business and, separately, end your non-resident-alien status under the substantial presence test [IRC §7701(b)].

A short example

A non-resident alien in Panama runs a design studio through a US LLC and bills US clients $200,000, doing all the work in Panama. The service is performed abroad, so there is no US trade or business and no US income tax on those profits. If instead she buys finished goods, holds them in a US fulfillment warehouse, and title passes to buyers in the US, that resale income is US-source and is ECI. Same owner, same LLC: the rule that applies depends on what she is actually doing.

Even at $0 tax, you usually still file

"No tax owed" is not "nothing to file."

• Single-member (disregarded) LLC: Form 5472 with a pro forma 1120 for any year with reportable transactions, including your own contributions and distributions [IRC §6038A]. The $25,000 penalty for missing it is real (full detail: internal link: Day 2).
• Multi-member (partnership) LLC: Form 1065 with Schedules K-1 and K-3, plus section 1446 withholding on any ECI allocated to foreign partners [IRC §1446].

If your setup has any US-side facts, people, an office, your own presence, or resale inventory with US title passage, a cross-border review tells you which side of the ECI line you are on (choosing the right entity comes next: internal link: Day 15).

FAQ

Who is a non-resident alien, and why does it matter here?

Someone who is not a US citizen, not a green-card holder, and not US-resident under the substantial presence test [IRC §7701(b)]. Only non-resident aliens get this treatment. A US citizen living abroad is taxed on worldwide income and cannot use a US LLC to reach $0.

Does selling to US customers create US tax?

Not by itself. The test is where your activity happens, not where customers are [IRC §864(b)]. The exception is resale inventory whose title passes inside the US.

Does warehousing inventory in a US fulfillment center create US tax?

It depends. If you produce the goods abroad and only warehouse them in the US, the production income is sourced where you produced them, so the warehouse alone is usually fine [IRC §863(b)]. If you buy and resell, income follows where title passes, and US title passage points to US-source income and ECI [IRC §861(a)(6)].

Is a US LLC taxed at 21% for foreign owners?

No. The 21% rate is for C corporations. A single-member LLC is disregarded and a multi-member LLC is a partnership, so non-resident-alien owners pay graduated individual rates on any ECI.

Does this apply to multi-member LLCs, or only single-member?

Both. The ECI test is identical. Filings differ: partnerships use Form 1065, Schedules K-1/K-3 and section 1446 withholding instead of the 5472 pro-forma path [IRC §1446; Treas. Reg. §301.7701-3].

Do I still file anything if I owe $0?

Usually yes. A disregarded LLC files Form 5472 with a pro forma 1120 for years with reportable transactions [IRC §6038A]; a multi-member LLC files Form 1065 with K-1s and K-3s, even in a $0-tax year.

This article is general information, not tax or legal advice. Your facts decide your outcome, and that is what a review is for.