What is chargeable income?

Tax Law: Delaware LLCs used by foreigners; what is U.S.-source and Effectively Connected Income versus foreign-source?

• If foreign nationals (non-resident aliens) utilize a Delaware LLC (taxed as a partnership); what income is U.S.-source income effectively connected to a trade or business in the U.S.? (all partners are non-resident aliens and the business has no nexus to the U.S. other than registration). Services performed in the United States is U.S.-source income. Services performed outside the United States is foreign source income, even if the business is registered in the United States? Software as a Service (SaaS) income - would that be U.S. source based solely upon U.S. company registration, or may it be foreign source on the basis the company is managed, intellectual property was developed, and all employees are located, outside the United States with no nexus other than registration? Virtual goods income (app Store sales and in-app purchasing) - ditto? -------- A hypothetical scenario you often run into is a few foreign entrepreneurs wanting to register a Delaware LLC in order to more easily secure U.S. banking and payment system processing; that is difficult and expensive to obtain in their own country; and expedite getting a Dunn & Bradstreet number required to get into the Apple App Store. Perhaps a preferred route would be to do a check-the-box election for Corporate tax treatment, and pay themselves a salary. Their salary is not taxed by the U.S. (they are performing all services outside the U.S.) and a deductible expense to the U.S. entity. The disadvantage is the inability to retain earnings inside the company without paying U.S. corporate income taxes. Another option is to have the Delaware LLC as a subsidiary of a foreign corporation (and check-the-box disregarded entity); however that does not seem to change the question of whether there is U.S.-source income (except for the fact the U.S.-subsidiary is more clearly just processing payments for the parent).

• Answer:

  Income that is US Source can be effectively connected income or nonbusiness income.  Effectively Connected Income (ECI) is income associated with a US trade or business.  A US trade or business are profit oriented activities carried out by the taxpayer directly or through agents that are regular, substantial and continuous.  ECI is taxed on a net income basis and allows for deductions for business expenses.  Generally, you want to file your 1120F, so you establish that you have ECI and can get an expense deduction and be taxed at graduated rates. If it is not ECI and is still US Source income, than it will be subject to a 30% withholding tax on gross revenue, which can be reduced by tax treaties.  So, if you have US Source income, it is generally, advantageous that it the income is ECI.  ,   So, really your question is whether or not you have US Source income, if you do have US Source income, then you want it to be ECI to avoid the 30% withholding tax.  The 3 examples that you casually threw out are all based on facts and circumstances.  While I can tell you the law generally, applying it to your specific client scenario is tax planning, and will need to be handled through a consultation.