ECI (ECTI) assessment for a foreign owned LLC - a little help pls

Mercado4

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So I have a problem and see if anyone had a similar experience, or at least knows a good advisor with the experience in the taxation of the foreign owned LLCs.

Set up:
1. Nevada LLC
2. 100% foreign owned
3. 100% software company - all software is built off-shore
4. No employees nor contractors in the USA - except for the registered agent who handles the LLC paperwork and is based in NV.
5. No office space, no warehouse - just a virtual office.
6. No clients in the USA - i.e. no US derived income.

This is the first time the company is filing taxes (for 2025), and our accountant claims we need to pay 37% withholding tax on the income earned in 2025. In fact he claims we ought to have engaged a withholding agent in NV to do so.

The way I understand it is that IRS employs 2 tests to establish whether the income is ECTI (Effective Connected Taxable Income) - some people call it just ECI.
1. Asset Use Test – Was the income generated by assets used in a US trade or business? For example, a factory in Texas owned by a foreign corporation producing goods for sale in the United States creates ECI.

2. Business Activities Test – Was the income a material factor in business activities conducted in the United States? For example, a foreign payee represents a company selling products at U.S. trade shows, and the sales revenue is effectively connected trade income.
Src: Understanding ECI Tax and Effectively Connected Income (ECI)

For us: No to the first, and also no to the second.

As such, we believe there is no US income at all and so no ECTI, therefore no withholding.

if anyone can share their own experience or at least know of an accountant willing to spend 30 min or so on the phone re: help us with this matter, it would be great.

At this point - given where we are in the taxation season, we will stick with this accountant as we have a contract with him. After that, who knows.

Thank you in advance!
 
No taxes. Fire your accountant.
You didn’t specify if the llc is single member (disregarded) or a partnership, but the substance is the same, just a different form to file.
If you want to waste some time with the accountant, ask him to identify the specific US source FDAP payments subject to 1441 withholding, the payee, and the form trail (1042/1042-S).
 
No taxes. Fire your accountant.
You didn’t specify if the llc is single member (disregarded) or a partnership, but the substance is the same, just a different form to file.
If you want to waste some time with the accountant, ask him to identify the specific US source FDAP payments subject to 1441 withholding, the payee, and the form trail (1042/1042-S).
Hi Johnny, it is a 2 member LLC, 50% each. Both foreigners, so I believe it is not a foreign owned disregarded entity but a partnership. Thank you!
 
Correct, so you have to file a form 1065 + 2× schedule K-1 (one per member)
Thank you, and yes - this is what I understand. The curve ball was his asking for Section 1446 and asking about a proof of retroactive tax withholding. That was the point the things started to diverge. And this despite spending a few hours with him last summer to explain the details of our setup, and our intentions. Back then it was all good. Thanks a lot!!!
 
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Thank you, and yes - this is what I understand. The curve ball was his asking for Section 1446 and asking about a proof of retroactive tax withholding. That was the point the things started to diverge. And this despite spending a few hours with him last summer to explain the details of our setup, and our intentions. Back then it was all good. Thanks a lot!!!
Just to be sure (and you need a new accountant anyway) talk with:
Post in thread 'US LLCs registered agent'
US LLCs registered agent
 
I will. I have a call on Monday set up with Entity.Inc so see what they can do. Worst case I probably get our current accountant to ask for an extension and pay him out, and that should give us time to find a new one.
 
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Your accountant doesn't know what he is talking about.

Try asking him what grounds there are that would be considerable ETBUS and derive ECI.

Even having US clients would not trigger it; the taxation is about activities taking place on US soil or by US taxable persons.
 
Your accountant doesn't know what he is talking about.

Try asking him what grounds there are that would be considerable ETBUS and derive ECI.

Even having US clients would not trigger it; the taxation is about activities taking place on US soil or by US taxable persons.
Thank you Filda! And yes this had been my understanding as well - this is why had designed our setup as I had described above. Thanks!
 

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