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!
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!
