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⚠️ Note:

1. The following explanations of terms are not 100% complete or comprehensive. True completeness might only be found by delving into the tax code. I will omit some information or exceptions that I personally consider relatively unimportant for my current situation regarding the “Tax Filing for a Foreign-owned U.S. DE,” such as the fact that there are more variations of Form 1040 than those mentioned below, or that not all foreign citizens need to undergo the Substantial Presence Test when determining NRA status, etc.
2. Furthermore, considering the contents of the U.S.-China Income Tax Treaty, the situation could become much more complex, to the point where I’m having a bit of trouble figuring it out… so I’ll skip that for now. I’ll research how to use the U.S.-China Income Tax Treaty to claim exemption from taxes only if/when I am actually deemed to have a USTB, have ECI, and need to pay taxes in the U.S. (There’s a good chance this won’t happen).

Glossary

Disregarded entity (DE)

An entity that, for U.S. federal income tax purposes, is not considered separate from its owner.

General Principle: As a DE, its income and expenses are “passed through” to its owner for U.S. income tax purposes. In theory, the owner can simply report this on their individual income tax return (using Form 1040).

Key Exception: Pursuant to the requirements of Internal Revenue Code Section 6038A, a Foreign-owned U.S. DE is treated as a separate corporation for specific reporting obligations. Therefore, a Foreign-owned U.S. DE must file a corporate income tax return (Form 1120) and must attach Form 5472.

Foreign-owned U.S. DE

Foreign-owned U.S. Disregarded Entity. Refers to a U.S. domestic disregarded entity that is wholly owned by a foreign individual.

A Wyoming SMLLC wholly owned by a non-U.S. tax resident individual is a typical example of a Foreign-owned U.S. DE.

NRA

Stands for Nonresident Alien, a concept in U.S. tax law used to define an individual’s tax status, specifically referring to foreign citizens who do not meet the criteria for U.S. tax residency.

The determination is based on the reverse outcome of the following two tests (i.e., failing both tests results in NRA status):

• Green Card Test: Fails the test if the individual was not a U.S. lawful permanent resident (i.e., did not hold a green card) at any time during the tax year.
• Substantial Presence Test: Fails the test if the individual does not meet either of the following conditions during the tax year:
  • Was present in the U.S. for more than 31 days in the current year, and
  • The sum of the following formula exceeds 183 days:
    (Days present in current year + Days present in prior year / 3 + Days present in second prior year / 6) > 183

ECI

Stands for Effectively Connected Income, which refers to income that is from U.S. sources and is directly connected to the conduct of a trade or business within the United States by a non-U.S. resident taxpayer.

Core Determination Logic: First, determine if a U.S. Trade or Business (USTB) exists. Then, identify which U.S. source income is effectively connected to that business.

If there is ECI, federal income tax must be paid. Individuals file Form 1040, and corporations file Form 1120. However, since an SMLLC is a DE, its income “passes through” to the individual, so the individual would need to file Form 1040 (or a variant).

But the company also has an independent filing obligation at the corporate level: to file Form 1120. If the SMLLC is owned by an NRA, it needs to file a pro forma Form 1120 and attach Form 5472.

Form 1040

U.S. Individual Income Tax Return. It is the form that the IRS requires eligible taxpayers to file annually to report their federal individual income tax.

Primarily used by U.S. tax residents, including U.S. citizens, green card holders, and foreigners deemed residents under the “Substantial Presence Test” (non-NRAs).

In addition to the standard Form 1040, there is a series of variants:

• Form 1040-SR: An optional form designed for taxpayers aged 65 and older.
• Form 1040-NR: Designed specifically for Nonresident Aliens to report their U.S. source income. When a nonresident alien has U.S. income, this form must be used instead of the standard Form 1040.
• Form 1040-X: Used to amend a previously filed Form 1040, Form 1040-SR, or Form 1040-NR.

When filing Form 1040, various schedules are typically attached to provide additional detailed information, such as:

• Schedule C: Used to report profit or loss from a sole proprietorship or single-member LLC.
• Schedule A: Used to report itemized deductions, such as medical expenses, state taxes, mortgage interest, and charitable contributions.
• Schedule B: Used to report interest and dividend income.
• Schedule D: Used to report capital gains and losses.

Form 1120

Filing Reference: Tax Filing for Non-Resident’s US LLC: Form 1120 Filing Guide

U.S. Corporation Income Tax Return. It is the form that the IRS requires eligible corporate entities to file annually to report their federal corporate income tax.

Entities taxed as C corporations, or other entities that have elected to be taxed as C corporations by filing Form 8832, as well as U.S. disregarded entities owned by non-U.S. persons or entities (Foreign-owned U.S. DEs), are required to file Form 1120.

However, a Foreign-owned U.S. DE files Form 1120 not because the entity needs to pay income tax like a C corporation, but to fulfill its special information reporting obligation. The Form 1120 filed by a Foreign-owned U.S. DE is only Pro Forma in nature. It only requires basic information to be filled out; no financial data needs to be entered.

A Foreign-owned U.S. DE must attach Form 5472 when filing the Pro Forma Form 1120, to report its transactions with foreign related parties. In fact, this Pro Forma Form 1120 mainly serves as a “cover sheet” for Form 5472 to meet formal requirements. The real focus is Form 5472.

Form 5472

Filing Reference: Tax Filing for Non-Resident’s US LLC: Form 5472 Filing Guide

Information Return of a 25% Foreign-Owned U.S. Corporation or a Foreign Corporation Engaged in a U.S. Trade or Business. It is an information return that the IRS requires specific corporations to file.

It is not itself a tax return used to calculate and pay taxes; rather, it is a tool for the IRS to monitor and track cross-border related-party transactions. It must be filed even if the company has no income and no tax liability. Failure to file incurs a minimum penalty of $25,000 per occurrence.

Summary

We just need to analyze the tax filing along two separate but somewhat connected lines: the individual and the company.

First, for the individual: Since I am a Nonresident Alien (NRA) and have no ECI, I do not need to file an individual income tax return, i.e., I do not need to file Form 1040-NR.

Second, for my U.S. LLC: It is a Foreign-owned U.S. DE, so the corporate income tax “passes through” to the individual. In theory, the company doesn’t need to file a return; the individual does. But the individual is an NRA with no ECI, so the individual also doesn’t need to file.

However, due to the requirements of Internal Revenue Code Section 6038A, a Foreign-owned U.S. DE has special filing obligations, but these are simplified. It does not need to file a standard Form 1120, but rather a pro forma Form 1120 with Form 5472 attached.

Additionally, if in the future my individual-level income is deemed to have ECI, but if there is no permanent establishment as defined under the U.S.-China Income Tax Treaty, I could utilize the treaty. When filing Form 1040-NR, I would attach Form 8833 to cite the treaty and claim exemption from tax.