Selling with Amazon FBA for Non-U.S. Residents - The Definitive Guide
Tapping into the U.S. consumer market through Amazon FBA is a potentially lucrative opportunity for entrepreneurs all over the world. You can sell products source from anywhere in the U.S. without need to have any physical presence in the U.S. But how complicated are the U.S. income tax requirements? The answer is that taxation for foreign Amazon sellers is quite complex and unfortunately there is a lot of misinformation about it online. This guide is going to clear all of that up for you.
First the Definitions
Before I even start explaining what forms needs to be filed and when, we have to start at the beginning and define the terms. I’ve spoken with many sellers who throw these terms around, but may not understand what they mean. The best place to look for these terms and their definitions is the IRS website. The IRS is the agency that taxes income at the federal level in the U.S. This is the agency who you file forms and remit tax. Only their definitions and views on these terms matter.
Trade or Business
Are you engaged in a trade or business? This is the first thing you must determine. If you are not engaged in a trade or business, then nothing else in this post should matter to you. Let’s look at the IRS definition.
This screenshot is from https://www.irs.gov/charities-non-profits/trade-or-business-defined
I think it’s pretty clear that selling on Amazon constitutes a business because you are selling goods for the production of income.
Trade or Business within the United States
Now that we have established that you have a business, the next question is do you have a business within the United States? This is obviously important because if you don’t have a business in the United States, then you would not have to worry about U.S. tax if you are not a U.S. resident.
This is where a lot of confusion comes from. You’ll see the terms USTB or ETBUS. These terms are short for United States Trade or Business or Engaged in United States Trade or Business. There are a lot of articles online that state that if you do not have a “dependent agent” operating your business in the U.S., then you do not have ETBUS. Further they will say that FBA is not a dependent agent and therefore you do not have ETBUS and you are not subject to U.S. tax. But is this really true? Let’s examine the facts.
This screenshot is from IRS training materials title LB&I International Practice Service - Practice Units provide IRS staff with explanations of general tax concepts as well as information about a specific type of transaction
As you can see from the training material above, there is no clear definition of a trade or business within the United States. Rather, the IRS relies on the facts and circumstances of each case. You’ll also see that the term dependent agent is mentioned. It states that you can be engaged in a trade or business through a dependent agent or directly. My interpretation of this is that if you are not using a dependent agent, then you are engaged directly. No where here does is state that if you are engaged in business through an independent agent that you do not have a U.S. trade or business. Furthermore, I think you would have a pretty hard time justifying that a business that entirely consists of selling goods in the U.S. to U.S. consumers is not a U.S. trade or business.
My opinion is that non-residents selling through FBA are engaged in a U.S. business. Other professionals may have a different opinion and I respect their interpretation of this information. Ultimately, you are the one liable for filing and/or paying U.S. tax if required. You must choose a professional that has clear thoughts on these matters and can recommend a course of action based on you situation. So now you know where I stand.
Effectively Connected Income
Now that we have established that selling through Amazon FBA as a non-resident is a U.S. business, we then need to examine whether that income is effectively connected income (ECI).
This screenshot is from https://www.irs.gov/individuals/international-taxpayers/effectively-connected-income-eci
Some misinformation online says that if you source products from outside the U.S. then you don’t have to pay tax because your products were not even sourced in the U.S. This is false. If you look further at IRS guidance, it clearly shows that no matter where you source your products, if you are selling them in the U.S. this is ECI.
This screenshot is from https://www.irs.gov/individuals/international-taxpayers/effectively-connected-income-eci
Now we have established the following 3 things:
Non-residents selling through Amazon FBA in the U.S. is a business
Non-residents selling through Amazon FBA in the U.S. is a U.S. business
Non-residents selling through Amazon FBA in the U.S. is ECI
Without any exceptions, income from a U.S. business is subject to U.S. federal income tax. As a non-resident, your income may not be subject to tax. Let’s examine whether or not you will need to pay tax.
Next the Treaties
The U.S. has entered into tax treaties with many countries. You can see if your country has a tax treaty or not here: https://www.irs.gov/businesses/international-businesses/united-states-income-tax-treaties-a-to-z
Treaty Countries
If you live in a country with a tax treaty and you do not have a “permanent establishment” in the U.S., then you are not subject to tax on your business profits in the U.S. Permanent establishment means staff, office or warehouse in the U.S. that you control. Most non-residents do not have permanent establishment.
Whether you pay tax on your business profits in your country is a question for your local accountant.
Non-Treaty Countries
If you live in a country with a tax treaty, you will pay income tax on your business profits. This is income minus expenses. The tax rates are graduated and start at 10% for the lowest net income and increase to 37% for the highest net income.
Whether you will also pay tax on your business profits in your country is a question for your local accountant. You may be double taxed if there is no treaty.
Choice of Entity Formation
Treaty Countries
U.S. LLCs
If you live in a country with a tax treaty, you should consider forming an LLC. You’ll need to get an EIN from the IRS, open a bank account in the name of the LLC with the EIN. You will pay no U.S. income tax, but you must file certain forms with the IRS to claim a tax treaty exemption.
U.S. Corporations
This is not a popular choice of entity with U.S. residents or non-residents. This is because you will pay U.S. income tax with a corporation at the entity level and your wages and dividends could also be subject to income tax. There is no tax treaty exemption for U.S. corporations.
One reason that you may want to operate as a corporation in the U.S. is if you live in a tax treaty country that has a higher tax rate than the corporate tax rate here. You’d pay the corporate income tax here in the U.S. and pay tax here on dividends you receive. The corporate income tax rate is 21% in the U.S. and the dividends (distributions of cash profits to you) tax rate depends on the rate in the treaty. Presumably if you paid the tax here for a U.S. entity, you wouldn’t pay tax in your home country. Check with your local accountant.
Non-U.S. Entities
If you sell in the U.S. through foreign business entity, you can still claim a tax treaty exemption, but by filing different forms. Also if you operate an LLC owned by a foreign entity, the U.S. LLC is disregarded and the foreign entity files the tax forms for a treaty exemption. You should segment your reporting so you know exactly how much of your profits are associated with U.S. sales.
Non-Treaty Countries
U.S. LLCs
If you live in a country without a tax treaty, you should consider forming an LLC. You’ll need to get an EIN from the IRS, open a bank account in the name of the LLC with the EIN. You will pay U.S. income tax, but the tax is based on your net profit at graduated rates. The more you make, the more you pay. However, as a non-resident, you will not be subject to self-employment tax like U.S. residents.
U.S. Corporations
This is not a popular choice of entity with U.S. residents or non-residents. This is because you will pay U.S. income tax with a corporation at the entity level and your wages and dividends could also be subject to income tax. Perhaps filing as a corporation and paying tax here in the U.S. would allow you to avoid tax in a non-treaty country. I’m not sure, check with your local accountant too.
Non-U.S. Entities
If you sell in the U.S. through foreign business entity you would file and pay income tax in the U.S. on your U.S. sales. You should segment your reporting so you know exactly how much of your profits are associated with U.S. sales.
What Forms Do You Need to File?
Treaty Countries
U.S. Single-Member LLCs Owned by an Individual
For the year following any calendar year that you were in business, you will need to file Form 5472 by April 15th if you transferred any money into your U.S. LLC bank account or transferred any money out of your U.S. LLC bank account. If there were no money transfers in or out, you do not need to file Form 5472. Form 5472 is just an information form to tell the IRS who owns the LLC and how much money was transferred in or out of the LLC’s bank account to you, the foreign person.
For the year following any calendar year that you were in business, you will need to file Form 1040-NR to report your tax treaty exemption. You will receive a 1099-K by January 31st in the tax document library of Amazon Seller Central. To file Form 1040-NR, you will need an ITIN. We can obtain an ITIN for you at the time of filling.
ITIN is applied for at the time of filing and the same ITIN can be used every year after that. You can get a certified copy of your passport at the U.S. embassy or consulate.
U.S. Single-Member LLCs Owned by a Foreign Entity
For the year following any calendar year that you were in business, you will need to file Form 5472 by April 15th if you transferred any money into your U.S. LLC bank account or transferred any money out of your U.S. LLC bank account. If there were no money transfers in or out, you do not need to file Form 5472. Form 5472 is just an information form to tell the IRS who owns the LLC and how much money was transferred in or out of the LLC’s bank account to the foreign entity.
For the year following any calendar year that you were in business, you will need to file Form 1120-F to report your tax treaty exemption. You will receive a 1099-K by January 31st in the tax document library of Amazon Seller Central. To file Form 1120-F, you will need an EIN that is separate from the EIN associated with the U.S. LLC.
U.S. Multi-Member LLCs
For the year following any calendar year that you were in business, you will need to file Form 1065 by March 15th. This is a partnership tax return in the U.S. Each member gets a K-1 reporting to the IRS that partner’s respective share of the income or loss. You do not need to file Form 5472, because each partners information about contributions and distributions is included on the Form 1065. Each partner will then need to file Form 1040-NR to report a tax treaty exemption. To file Form 1040-NR, you will need an ITIN. We can obtain an ITIN for you at the time of filling.
ITIN is applied for at the time of filing and the same ITIN can be used every year after that. You can get a certified copy of your passport at the U.S. embassy or consulate.
U.S. Corporations
For the year following any calendar year that you were in business, you will need to file Form 1120 by April 15th. This is the corporate tax return in the U.S. Form 5472 will be filed as part of the Form 1120. You may have to also file forms if dividends are received by shareholders.
Non-Treaty Countries
U.S. Single-Member LLCs
For the year following any calendar year that you were in business, you will need to file Form 5472 by April 15th if you transferred any money into your U.S. LLC bank account or transferred any money out of your U.S. LLC bank account. If there were no money transfers in or out, you do not need to file Form 5472. Form 5472 is just an information form to tell the IRS who owns the LLC and how much money was transferred in or out of the LLC’s bank account to you, the foreign person.
For the year following any calendar year that you were in business, you will need to file Form 1040-NR to report your business profits on Schedule C. You will receive a 1099-K by January 31st in the tax document library of Amazon Seller Central. To file Form 1040-NR, you will need an ITIN. We can obtain an ITIN for you at the time of filling.
ITIN is applied for at the time of filing and the same ITIN can be used every year after that. You can get a certified copy of your passport at the U.S. embassy or consulate.
U.S. Single-Member LLCs Owned by a Foreign Entity
For the year following any calendar year that you were in business, you will need to file Form 5472 by April 15th if you transferred any money into your U.S. LLC bank account or transferred any money out of your U.S. LLC bank account. If there were no money transfers in or out, you do not need to file Form 5472. Form 5472 is just an information form to tell the IRS who owns the LLC and how much money was transferred in or out of the LLC’s bank account to the foreign entity.
For the year following any calendar year that you were in business, you will need to file Form 1120-F to pay tax. You will receive a 1099-K by January 31st in the tax document library of Amazon Seller Central. To file Form 1120-F, you will need an EIN that is separate from the EIN associated with the U.S. LLC.
U.S. Multi-Member LLCs
For the year following any calendar year that you were in business, you will need to file Form 1065 by March 15th. This is a partnership tax return in the U.S. Each member gets a K-1 reporting to the IRS that partner’s respective share of the income or loss. You do not need to file Form 5472, because each partners information about contributions and distributions is included on the Form 1065. Each partner will then need to file Form 1040-NR to report their respective share of the business profits if the partner does not live in a treaty country. To file Form 1040-NR, you will need an ITIN. We can obtain an ITIN for you at the time of filling.
ITIN is applied for at the time of filing and the same ITIN can be used every year after that. You can get a certified copy of your passport at the U.S. embassy or consulate.
U.S. Corporations
For the year following any calendar year that you were in business, you will need to file Form 1120 by April 15th. This is the corporate tax return in the U.S. Form 5472 will be filed as part of the Form 1120.
Other Taxes and Fees
I am including this part, although off-topic. The reason why is because so many sellers throw around the word tax, but don’t necessarily understand that there are many kinds of tax.
Sales Tax
The previous taxes discussed were income taxes. We often receive questions about sales tax. Sales tax is a tax that is charged on the sale of a product to the customer buying the product. The customer pays the tax and Amazon collects that tax and remits it to the taxing authorities based on the location of the buyer. Amazon handles all of this. If you are only selling on Amazon, you do not need to worry about sales tax.
State Income Taxes
Unless you are selling more than $5 million per year, you do not need to worry about state income tax. State income tax filings may be required by sellers who have FBA stored inventory of more than $50,000 stored in warehouses in one state or have sales of $500,000 or more into a single state. This is unlikely unless you are selling at least $5 million per year.
State Filing Fees
When you register an LLC in Wyoming or any other state, you’ll need to pay annual filing fees to keep the LLC active. The state you register your LLC in will send you a mailing notifying you of the required annual fee payment. We do not handle these filing fees as they are simple enough for any business owner to handle on their own and usually only require a confirmation that your contact information is current.