Delaware is one of the most popular states for business entities such as LLCs, especially for non-US residents. It offers strong legal and privacy protection for LLC owners. Delaware is one of the most business-friendly states and there is a certain perceived prestige to say your company is from Delaware. Delaware also doesn’t tax out-of-state…
Delaware is one of the most popular states for business entities such as LLCs, especially for non-US residents. It offers strong legal and privacy protection for LLC owners. Delaware is one of the most business-friendly states and there is a certain perceived prestige to say your company is from Delaware.
Delaware also doesn’t tax out-of-state income, making it an attractive option for non-resident business owners. Read on to understand Delaware LLC taxation for non-US residents and weigh whether Delaware is the right state to form your business.
Understanding the Importance of Taxation for a Foreign-Owned Delaware LLC
The advantages and benefits of setting up a Delaware LLC for non-US residents come from privacy and favorable taxation.
Delaware offers favorable tax treatment. Even for US residents, Delaware doesn’t tax out-of-state income. It has a graduated state individual income tax ranging from 2.2% to 6.6%. There is also no sales tax in Delaware. While the $300 annual filing fee is higher than in many states, the other favorable tax treatment should compensate for that filing.
How Does LLC Taxation in Delaware Work for Non-US Residents?
Delaware LLC taxation for non-US residents works similarly to US residents, with a few key differences. Your state tax liability depends on whether you performed business or earned income in the state. If so, you’ll be taxed on a sliding scale from 2.2% to 6.6% for that Delaware-based income. You don’t have to pay state income tax on foreign income or income earned in another US state.
Next, your federal tax liability depends on whether your business is considered an active business and if you’re engaged in trade or business in the US (ETBUS). To qualify as ETBUS, your company needs to have at least one dependent agent in the US, and that dependent agent must do something substantial to further your US business.
Simply put, if the people who run your business are in the US or the business has significant operations, you’ll be subject to income tax. If your business only has a foreign source of income and doesn’t qualify as ETBUS, you won’t have to file taxes in the US.
If your country of residence has a tax treaty with the US, you may be subject to additional rules or tax credits.
Finally, you’ll need an EIN for the LLC to file taxes with the IRS. A foreign person who owns a single-member LLC must file Form 5472 and Form 1120. In the case of a foreign-owned multi-member LLC, the LLC must file an informational Partnership Return (Form 1065) and issue K-1s to each member. Each LLC member is then responsible for filing a US income tax return. It’s worth checking with a tax professional or CPA to ensure correct filings.
Engaged in Trade or Business in the US (ETBUS)
According to IRS definitions, companies that are engaged in trade or business, abbreviated ETBUS, are companies that have at least one dependent agent in the US. That dependent agent must do something substantial to further your US business and not just something ministerial or administrative.
This is important for the taxation of your Delaware LLC, as Delaware doesn’t tax income earned outside the state. That means if your LLC is ETBUS but not in Delaware, you might not have any state tax liability. But, an ETBUS company will need to file appropriate federal taxes.
Foreign Source Income vs US Source Income
Foreign income is income earned outside the United States. US sources of income require reporting and are taxed at a flat rate of 30% at the federal level to the IRS. You must file taxes at the end of the year on Form 1040-NR. However, there are exceptions to this.
For example, if you work in Poland, your salaries and wages earned there aren’t taxed in the US. However, if you are an author selling books in the US, the US-based income is considered a US source of income, and you must pay US income tax and applicable Delaware state income tax. The IRS offers a comprehensive list of the sources of income. Here’s what to consider:
Type of Income
How to determine whether it is foreign or US
Salaries, wages, other compensation
Where services are performed
Business income: Personal services
Where services are performed
Business income: Sale of inventory purchased
Where inventory is sold
Business income: Sale of inventory -produced
Where produced, although allocation may be necessary
Depending on whether it is a U.S. or foreign corporation
Location of the property
Royalties, patents, or copyrights
Where a copyrighted item is used
Sale of real property
Location of the property
Sale of personal property
Seller’s tax home
Where services were performed that earned the pension
Scholarships or Fellowships
Usually the residence of the payer
Sale of natural resources
Based on the fair market value of the product at the export terminal. More in IRC section 1.863–1(b).
How Tax Treaties Can Help Your Delaware LLC as Non-US Residents?
Tax treaties can help your Delaware LLC to save more or avoid double taxation. The US has several tax treaties with other countries. If your home country has a tax treaty with the US, it could simplify taxes for your Delaware LLC. You can check with the IRS or a certified tax professional who understands tax implications in your country of residence and the US.
With a tax treaty between your country of residence and the US, you could potentially qualify for:
Reduced rate of taxes
Treaty benefits or safeguards
How to File Taxes for Your Foreign-Owned Delaware LLC?
Once you have identified your income source and individual taxpayer identification number or ITIN, you can proceed to file taxes for your foreign-owned Delaware LLC. Note that you’ll need to file income tax forms with the Internal Revenue Service (IRS) and the state of Delaware.
Gather Necessary Documentation
The first step is to ensure you have all the necessary documentation to file taxes for your LLC, including income statements, expense records and receipts, and any other documentation. Consulting a CPA or tax professional to ensure you have all documentation can save time when you’re ready to file.
Decide on Your Tax Classification
As a non-US resident, your Delaware LLC can be treated as a disregarded entity, a partnership, or a corporation for tax purposes. Which taxation structure you elect depends on the size of your business, type of business, and business goals.
There are pros and cons to each, but most LLC owners choose a simple pass-through filing. However, if you elect to form a corporation, you benefit from additional favorable treatment in Delaware.
Fill Out the Appropriate Tax Forms
Filing taxes for a Delaware LLC can require various forms, depending on your tax classification election. There are different forms for individuals, partnerships, or corporations. Depending on whether you elect to be taxed as a pass-through entity, as a foreign partner within an LLC, or as a corporation, here are the forms you might need:
Form 1040-NR for Nonresident Alien Income LLC owners to declare the profits they earned from the LLC.
Form 1042: Annual Withholding Tax Return for US Source Income of Foreign Persons
Form 8804: Annual Return for Partnership Withholding Tax
Form 8805: Foreign Partner’s Information Statement
Form 5472: Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business
Form 1120-F: U.S. Income Tax Return of a Foreign Corporation
Form 8288: U.S. Withholding Tax Return for Certain Dispositions by Foreign Persons
Pay Any Required Taxes
If you owe taxes to the US government, make sure to pay them by the deadline. Filing dates vary based on whether you elect to be taxed as a corporation or as a pass-through entity. For partnerships, multi-entity LLCs, and S-corporations, the filing date is March 15 for filing 1065 and 1120S returns with the Schedule K-1s.
If you’re ready to form a Delaware LLC, doola can help. Get doola’s fast and professional formation services in all 50 states, including Delaware. You’ll also get help with getting an EIN and opening a bank account. Get doola here!
Do non-US residents need to file personal income tax returns in the US if they own a Delaware LLC?
You will need to file a personal income tax return if you, or the LLC, have US-sourced income. For non-US residents, a Delaware LLC will only need to pay taxes on income from U.S. sources. Income from other countries will not be taxed by the US.
What taxes do non-US residents need to pay for their Delaware LLC?
You must pay relevant state and federal income taxes on US income for a Delaware LLC. You don’t need to pay taxes on foreign income in the US.
Are non-US residents eligible for any tax benefits or exemptions?
You usually cannot claim any tax benefits or exemptions as a non-US resident. However, a US-based LLC may qualify for tax benefits, credits, or exemptions based on the business and state or federal incentives. For example, the business might qualify for a Clean Energy Credit. Likewise, if your country of residence has a tax treaty with the US, you might qualify for an exemption.
Are there any withholding requirements for non-US residents operating a Delaware LLC?
For non-US residents, a Delaware LLC will only be taxed on income from US sources. You will need to withhold and pay relevant state and federal taxes for US-based income.
How can non-US residents ensure compliance with Delaware LLC tax obligations?
To ensure compliance with Delaware LLC tax obligations, you can start by obtaining an EIN for your non-US resident business to file taxes. Non-US residents can work with a tax professional or CPA to help ensure compliance and on-time filings.
Doola's website is for general information purposes only and
doesn't provide official law or tax advice. For tax or legal advice we are happy to connect
you to a professional in our network! Please see our terms
to reach out with any questions.