ARTICLE | October 27, 2026

First question – do I have a US Trade or Business (USTB)?

Having a USTB is the touchstone for US taxation of a foreign person/company’s business income.  However, there is no comprehensive definition of what a USTB is in the tax code or regulations.  Relevant case law suggests that a USTB exists only if the activities of the taxpayer, OR dependent agents (defined below) of the taxpayer, are considerable, continuous, and regular inside the US.

Regular, continuous, and substantial U.S. business activities strongly support USTB status; isolated sales to US customers, without more, do not necessarily do so. There is no stated gross-receipts, sales-volume, or customer-count threshold that automatically creates a USTB.

Dependent agents are legally and economically reliant on the foreign entity and typically would only work for the foreign entity. Note that dependent agents do not include US corporations, and the income of US corporations is not imputed to foreign stockholders even if they control 100% of the stock.   US-based employees, officers or dependent agents, a US office, or warehouse operations the seller runs itself all push toward a US trade or business.  Selling through independent platforms and 3PLs that serve many sellers points the other way, though inventory in US warehouses remains a gray area that depends on the facts, especially if a US warehouse is a regular/integral operating base for the foreign corporation seller.

The foreign company is less likely to have a USTB if it:

• Has no U.S. office, employees, dependent sales agent, or U.S. fulfillment operations;
• Accepts orders and concludes contracts outside the United States;
• Has its supplier ship directly to the customer; and
• Does not perform services in the United States.

This brings in another concept, Permanent Establishment, which will be discussed later in this article.

Effectively Connected Income (ECI)

A foreign person or business is subject to US federal income taxation if it has ECI relating to the USTB.

ECI includes US-source income of a foreign corporation engaged in a USTB.  It would be rare for there to be a USTB with no ECI.

US sourced income is where federal exposure starts, but it doesn’t decide the tax on its own. ECI is income connected with a US trade or business, meaning activity in the US that is considerable, continuous and regular. Regarding a single member LLC (a disregarded entity), its activity is treated as the owner’s.  Thus, if the single member LLC does not have ECI associated with a USTB in the US, then it is unlikely that the member of the LLC would have ECI.

The three elements that need to come together for the US to tax a foreign corporation on business profits is that a) there needs to be a USTB, b) there is ECI-which is usually true if there is a USTB- and c) the ECI is US sourced income.

What if income is US sourced but not ECI?

A seller with no US trade or business generally owes no federal income tax on its product sales, even if the sales are considered US sourced income.  US sourced income from a significant US customer base by itself does not create ECI.

What if there is a USTB with ECI?

A foreign corporation pays 21% on net ECI, plus a 30% branch profits tax on profits not reinvested in the US, for a combined rate of up to about 44.7%. An individual owner pays graduated rates up to 37%, with no branch profits tax.

Form 5472 with a pro forma Form 1120 is required when a single member LLC is used by the foreign corporation, regardless of whether there is a USTB or ECI.

Does a tax treaty help?

Most US treaties let the US tax business profits only when a foreign corporation has ECI in the US and also has a “permanent establishment” (defined below) in the US; this is a higher bar than a USTB, and treaties can reduce other taxes associated with a foreign corporation with ECI in the US.  It is important to note that many countries have no income tax treaty with the US, so a US LLC owned by a residents of these countries cannot rely on a treaty to reduce federal income tax on a USTB with ECI and US sourced income.

What is Permanent Establishment PE?

A permanent establishment, often called a PE, is a treaty concept. It generally means that the foreign seller has a sufficiently established business presence in the United States. When a treaty applies, a PE is usually the threshold that allows the United States to tax business profits attributable to that U.S. presence.

For an e-commerce seller, the facts that commonly matter include:

• A U.S. office or other fixed place of business used by the seller;
• U.S.-based employees or representatives who regularly negotiate or conclude contracts for the seller;
• Fulfillment or warehouse operations that the seller controls, rather than a truly independent provider serving many sellers; and
• Services performed in the United States that are part of the seller’s business.

The risk is generally lower when orders are accepted and contracts are completed outside the United States, products are shipped directly by a supplier, and the seller has no U.S. office, personnel, or seller-controlled fulfillment operation. Using a third-party marketplace or logistics provider does not automatically eliminate risk; inventory and fulfillment arrangements should be reviewed under the applicable treaty and the actual operating facts, if a USTB is first deemed to exist. 

Some states don’t follow any of this

As we noted in the prior article, some states don’t follow the concept of a USTB, ECI, federal sourcing rules or treaties. Inventory warehoused in a particular state (physical presence) can create state income tax nexus sufficient for annual income tax filings, and gross receipts taxes such as Washington’s excise tax and Oregon’s corporate activities tax apply to revenue regardless of profit. Many states also impose annual revenue thresholds that, once exceeded, wrap a foreign person or company into state income tax filings even if there is no physical presence.  A seller with no federal tax can still owe state income or gross receipts tax.  Finally, certain states have more stringent rules relating to income tax nexus for corporations organized outside the US compared to corporations organized in the US, if all the corporation is doing in the subject state is solicitation for sales/advertising.  All of this is in addition to the various rules relating to sales tax when an out of state company sells to customers in another state.

Foreign-owned ecommerce brands should document who does what in the US, where inventory sits, evaluate income sourcing rules applicability, and whether federal and state filings are current. Larson Gross’s international tax team can help you evaluate your structure.

This article is for general information only.