U.S. Tax Attorney
Foreign sellers – especially those based in China and other non-U.S. jurisdictions – face a unique and often misunderstood set of U.S. tax risks when selling products into the U.S. marketplace. Whether you use Amazon FBA, Shopify, Walmart Marketplace, 3PL warehouses, or U.S.-based agents, you may unknowingly trigger U.S. tax obligations even if your company remains entirely foreign.
Marketplace Tax is a specialized legal service designed specifically for nonresident business owners who sell foreign-originated goods to U.S. customers.
I help you understand, reduce, and strategically manage your U.S. tax exposure – before the IRS finds you. Below are the core problems foreign e-commerce sellers face and how I help solve them.
MY PRACTICES
Treaty Planning
Nexus Risk
Compliance Filing
Entity Setup
Tax Strategy
Do I Owe U.S. Taxes on Amazon Trade?
A deep dive on U.S. Trade or Business (USTB), Effectively Connected Income (ECI), nexus, and the practical risks that arise from Amazon FBA, 3PL storage, and U.S. agents
Foreign sellers who ship goods from China or elsewhere into the United States often assume that “I’m not in the U.S., so I don’t owe U.S. tax.” That assumption is legally fragile. U.S. tax law distinguishes between mere passive receipts of U.S.-source payments and income that is effectively connected with a U.S. trade or business. If a foreign person or corporation has income that is ECI, that income is taxed in the U.S.; if a foreign enterprise is doing business in the U.S., it may also have filing obligations and be subject to branch taxation and withholding rules. The statutory backbone for these outcomes is found in Internal Revenue Code §864 and the ECI rules and administrative guidance implementing it.
The central legal question — what makes a USTB and what is ECI? Two related concepts determine federal income tax exposure for foreign sellers: (1) whether the foreign taxpayer is conducting a U.S. trade or business (USTB), and (2) whether the taxpayer’s income is effectively connected with that USTB (ECI). The USTB inquiry is factual and holistic: courts and the IRS look to whether the taxpayer’s activities in the United States are considerable, continuous, and regular and whether U.S. activities are a material factor in generating the income. If a USTB exists, then U.S.-source income that is connected with those activities is ECI and is taxed on a net basis in the United States. The IRS’s plain-language guidance for taxpayers summarizes this connection and the resulting filing and tax consequences. IRS
Statutory and regulatory text codifies and constrains that analysis. IRC §864 lays out definitions and special rules for what is treated as effectively connected; Treasury Regulations under §1.864 provide detailed rules for apportioning income and determining when foreign-source items may nonetheless be treated as ECI because they are attributable to a USTB. These authorities are the legal reference points for any formal risk assessment.
Why Amazon FBA, 3PLs, and U.S. logistics change the legal landscape. The modern e-commerce model separates contract formation, marketing, and payment (often conducted overseas) from warehousing and fulfillment (routinely performed inside the United States by Amazon or third-party logistics providers). That separation is the source of both confusion and risk.
From a domestic (IRC/regulatory) perspective, using U.S. fulfillment centers can create sufficient U.S. activity to support a USTB determination in some fact patterns. Inventory sitting in U.S. warehouses that is used to fill U.S. customer orders can be characterized as U.S.-based business activity because the storage and distribution operations are part of the enterprise’s revenue-generating process. Where activities taking place in the U.S. are integral to sales (not merely preparatory), the IRS and many analysts treat the income as potentially ECI. Practical IRS education materials and practitioner summaries make this connection explicit for sellers relying on FBA.
The precise outcome depends on the facts: whether the seller maintains U.S. inventory year-round or only seasonally, how orders are accepted and processed, whether the seller’s personnel in the U.S. (including agents or employees) exercise significant sales or contracting authority, and whether the foreign taxpayer maintains a fixed place of business in the U.S. that is attributable to the enterprise. The legal test is never a single bright-line activity but a totality-of-facts probe. Treasury regulations and IRS practice both emphasize that attribution of income and the existence of a USTB are fact sensitive.
The treaty lens — Permanent Establishment and the OECD standard. If the foreign seller’s home country has a tax treaty with the United States, the treaty’s Permanent Establishment (PE)concept governs whether the U.S. can tax business profits under the treaty. Most U.S. treaties adopt the OECD Model’s Article 5 formulation or a close variant: a PE generally requires a fixed place of business (or a dependent agent who habitually concludes contracts). Under many treaties, mere storage of goods for the purpose of storage, display or delivery is carved out as not creating a PE, but the carve-out is limited to strictly preparatory or auxiliary activities. The OECD commentary and ongoing multinational work (including recent updates) clarify that where warehouse or distribution activities go beyond mere storage (e.g., order processing, returns management, bundling or assembly), a PE could be found. Practitioners routinely counsel that the storage exception is narrow and fact-dependent, and countries are actively updating commentary and guidance to address digital commerce and modern logistics.
Because treaty law can diverge from domestic judicial and administrative results, a taxpayer can be “USTB/ECI” under U.S. domestic law yet still claim treaty protection (for example, arguing no PE exists under the treaty) – but that treaty position must be defensible and usually requires formal documentation and, in contentious cases, an explanation filed with tax returns. The IRS requires treaty-based return positions to be disclosed using Form 8833 where applicable, and Form 1120-F is the filing vehicle for a foreign corporation reporting income effectively connected with a USTB.
The critical distinctions: dependent agent, fixed place, and preparatory/auxiliary activities. Three concepts determine the line between mere presence and taxable presence: (1) fixed place of business, (2) dependent agent (habitually concluding contracts on behalf of the enterprise), and (3) whether the activities are preparatory or auxiliary.
A fixed place requires both a physical location and sufficient permanence. A few pallets of inventory or a brief promotional display will not usually be enough, but long-term, continuous occupancy of warehouse space used to carry on the business may meet the threshold. Similarly, an agent in the U.S. who habitually negotiates and concludes contracts or exercises binding authority can convert otherwise passive operations into taxable ones. Finally, Article 5’s preparatory/auxiliary exception and its national counterparts mean that purely storage (or display/delivery) activities that are strictly ancillary to the business usually will not create a PE – but when warehousing is an integral part of the distribution and fulfillment chain (for instance, if the warehouse operator also processes returns, customizes products, or performs order selection), the exception may not apply. These are classic fact-intensive determinations and feature prominently in treaty commentary and domestic guidance.
State nexus is a separate – but sometimes parallel – concern. State income tax and sales tax rules create a second axis of U.S. exposure. Even if federal ECI is avoided (or limited) under treaty or domestic law, storing inventory in a state typically creates sales tax nexus (and in many states now an economic nexus) and may, under state rules, create corporate income tax filing obligations. States move quickly to assert nexus where substantial in-state fulfillment occurs—Amazon’s presence in multiple states via FBA has resulted in thousands of seller registrations and obligations. As a result, a foreign seller may be subject to a patchwork of state registration, collection, and filing rules independent of the federal ECI/USTB analysis. Practical risk assessments therefore must include a state-by-state mapping of storage, marketplace facilitator law impact, and economic nexus thresholds.
What the IRS expects you to file if a USTB/ECI exists. When a foreign corporation is engaged in a USTB and has effectively connected income, it generally must file a U.S. income tax return. For corporations, that is Form 1120-F, which reports U.S.-source income and computes tax and any branch profits tax. If the foreign enterprise uses a U.S. entity or has related U.S. party transactions, information returns such as Form 5472 and withholding filings (Forms 8804/8805 for partnerships or other withholding contexts) may also be required. Treaty positions taken on returns should be disclosed where required (Form 8833). Failure to file required returns can trigger significant penalties; the IRS’s official instructions and taxpayer guidance explain the form and timing requirements.
Evidence, documentation, and defensibility – how to build a robust position. Because the USTB/ECI determination is fact-specific, documentation is the taxpayer’s primary defense. Useful evidence includes: contracts that limit agent authority in the U.S.; written terms showing that inventory ownership and control remain with the foreign vendor until sale; logs and reports showing that U.S. activity is limited to storage and delivery; and contemporaneous policies explaining the role of Amazon or a 3PL as an independent contractor rather than a dependent agent.
If a taxpayer seeks to rely on a treaty position, an independent legal opinion analyzing Article 5 and the specific treaty text — with attention to the OECD commentary and any bilateral interpretive notes – strengthens a claim. Where a treaty treaty claim is relied upon to avoid federal tax, filing Form 8833 and the corresponding returns (e.g., Form 1120-F when required) is often necessary to preserve the position and reduce the risk of later penalties for non-disclosure.
Recent policy and doctrinal developments to watch. International tax practice is actively evolving in response to digitalization and modern logistics. The OECD has continued to update guidance on Article 5 and the application of PE concepts to home offices, warehouses, and distribution networks. At the same time, the U.S. continues to refine enforcement priorities for marketplace sellers and third-party platforms. These changes do not rewrite the core statutory tests, but they sharpen the questions examiners and treaty partners will ask – meaning that today’s storage model, once assumed safe, attracts more scrutiny than it did a decade ago. Practitioners therefore recommend periodic reassessment of the facts and of any structural choices (e.g., whether to form a U.S. entity or change logistics arrangements).
Practical outcomes and common case patterns. Three recurring outcomes appear in practice:
-
No USTB/ECI – low-risk factual profile. Sellers use U.S. fulfillment briefly, maintain no U.S. personnel or agents with contracting authority, inventory is transitory, and warehouse activity is demonstrably preparatory/auxiliary. A defensible treaty position often accompanies this profile when relevant.
-
USTB/ECI exists under domestic rules but a treaty argues no PE. The taxpayer may report conservatively under domestic law but assert a treaty position supported by a PE opinion; this path requires careful documentation and disclosure.
-
USTB/ECI exists and filing/withholding obligations follow. Year-round U.S. inventory, significant logistics activity, or dependent agent activity lead to Form 1120-F filings, withholding obligations, and state registration. This pattern is common among high-volume FBA sellers who have not restructured their logistics or contracting model.
What a practical legal assessment must include. A defensible USTB/ECI risk opinion for a foreign seller requires (a) a careful mapping of day-to-day operations and contracts with platforms/3PLs; (b) a sourcing and apportionment analysis under IRC §§861–862 and Treas. Regs.; (c) a PE analysis under the relevant treaty text and OECD commentary; (d) a state nexus and sales tax review; and (e) proposed remediation or restructuring options if exposure exists (for example, changing contract terms, altering inventory routing, or forming a U.S. entity with managed activities). The IRS and Treasury rules are the primary law, but treaty text and OECD commentary shape cross-border outcomes; therefore a rigorous assessment must reconcile domestic and treaty outcomes while crafting a defensible compliance path.
Bottom line – how to think about your risk. The correct posture for the foreign seller is cautious realism. Modern fulfillment networks and marketplace models create real and documentable pathways to U.S. tax exposure. Whether the ultimate outcome is federal taxation, treaty protection, or only state registration depends on granular facts: inventory flows, contractual delegation, agent authority, and the exact scope of U.S. logistics tasks. Because the cost of getting it wrong can include multi-year tax liabilities and penalties, the prudent move for any foreign seller with significant U.S. fulfillment or distribution is a formal U.S. Tax Footprint & Nexus Risk Assessment that documents facts, applies statutory and treaty tests, and yields a written position the client can rely upon.
How Permanent Establishment (PE), treaty exceptions, and careful structuring can shield you – or backfire – when selling to U.S. customers
For many foreign sellers bringing goods from China, Europe, or other non-U.S. jurisdictions to U.S. customers via warehouses, fulfillment centers, or 3PL logistics, the specter of U.S. taxes looms large. Under U.S. domestic tax law, they may trigger a USTB or ECI – and face net-basis U.S. taxation. However, if their home country maintains a U.S. income tax treaty, it may be possible to avoid U.S. tax on business profits by relying on the treaty’s Permanent Establishment (PE) standard rather than the broader USTB test.
Below I explore how treaties work, when they apply, their limitations, and how sellers can (or cannot) rely on them – all based on authoritative sources.
The Treaty Framework: From USTB to PE. U.S. domestic law treats foreign persons (individuals or corporations) broadly: if they are engaged in a U.S. trade or business and earn income connected to that business, that income can be taxed in the U.S. However, under most U.S. bilateral income tax treaties – which follow the structure of the OECD Model Tax Convention – there is a higher threshold for taxation of business profits. Rather than USTB alone, a foreign enterprise’s profits are taxable in the U.S. only if it carries on business in the U.S. through a “permanent establishment.”
Article 5 of the Model Convention defines a PE as a “fixed place of business through which the business … is wholly or partly carried on.” Typical examples include a branch, office, factory, or other fixed premises. Thus, under a treaty, even if a foreign seller uses U.S. warehouses or fulfillment centers, that does not automatically mean U.S. taxation – because owning U.S. inventory or using U.S. fulfillment does not necessarily create a PE. This is often the primary “gateway” for treaty-based relief.
The “Warehouse Exception”: When Storage ≠ Permanent Establishment. Crucial to many e-commerce sellers is the “warehouse exception.” Under Article 5(4) of the OECD-style treaties, certain activities – even if done at a fixed place – do not by themselves create a PE. These include:
-
using facilities solely for storage, display, or delivery of goods;
-
maintaining a stock of goods solely for storage, display, or delivery;
-
maintaining a stock of goods solely for processing by another enterprise;
-
purchasing goods or collecting information;
-
other activities that are “preparatory or auxiliary” in nature.
What this means: if your U.S. presence consists only of a warehouse (e.g., an FBA or 3PL warehouse) or inventory storage, and the warehouse activity is limited to storage, delivery, or distribution – with no other significant business operations – many treaties will permit you to claim no PE, and thus shield business profits from U.S. taxation.
In practice, many foreign sellers who store inventory in the U.S. adopt this logic: they argue that final delivery to customers is Amazon’s (or the 3PL’s) responsibility; the seller’s role ends at the warehouse, which qualifies as “storage/delivery only.” If accepted, that argument can keep U.S. tax liability at bay.
When a Treaty Won’t Help – Dependent Agents, Active Sales, and Substantial U.S. Activity. However, the warehouse exception is not a magic shield. It only works if U.S. activities remain strictly limited to the excluded list. Once you go beyond storage/delivery – i.e., engage in sales, marketing, contract negotiation, or returns processing; or use agents in the U.S. with real authority – the risk of having a PE (or a “dependent-agent PE”) increases materially.
Treaties typically treat a U.S. “dependent agent” who “habitually exercises authority to conclude contracts in the name of the enterprise” as a PE.
In the e-commerce context, this risk arises if you (or your representative) handle price negotiations, customer contracts, returns, or fulfillment instructions from within the U.S., or if a U.S.-based subsidiary (or agent) performs core sales functions on your behalf. In such circumstances, the storage-only exception may unravel, and the PE standard will likely be met.
Additionally, even if there is no U.S. PE under treaty law, if your home country does not have a treaty with the U.S., or if you fail to qualify as a “resident” under the treaty, the default U.S. domestic standard (USTB/ECI) controls – meaning treaty relief is simply unavailable.
Why Treaty-Based Relief Requires Careful Documentation and Structure. Because treaties give more favorable thresholds – but apply only if strict conditions are met – claimants must be diligent. A robust treaty-reliant structure should include:
-
Contracts that clearly limit U.S. warehouse / 3PL to storage, delivery, or logistics services, treating them as independent contractors without authority to negotiate or conclude contracts.
-
No U.S. personnel, agents or subsidiaries with binding authority or habitual contract-closing power.
-
Sales, pricing, and order confirmation activities conducted outside the U.S. (e.g., from home country).
-
Written policies and service agreements that reflect the limited functional role of U.S. operations.
Without such documentation, a tax authority (or IRS) could challenge the “storage-only” argument, recharacterize the warehouse or agent as a PE, and impose U.S. tax on business profits. Indeed, commentators emphasize that the deeper the U.S. presence – both physically and functionally – the harder it becomes to defend a treaty-based exemption.
Moreover, the U.S. (and treaty partners) are increasingly attentive to supply-chain realities in the modern e-commerce era: what might have looked like an “innocent warehouse” decades ago may now involve fulfillment, returns, kitting, packaging, bundling – functions that go beyond storage or delivery. These developments make it more important than ever to revisit treaty positions periodically and carefully.
When Treaty Relief Helps – and When It Fails in Practice. In favorable cases, a foreign e-commerce seller from a treaty country may succeed in structuring U.S. sales in a way that avoids U.S. federal income tax altogether: the business profits remain attributable to the foreign home office, and the U.S. exposure is limited (or eliminated) under the treaty. This is often the outcome when the seller uses FBA or 3PL purely for logistics, leaves contracting and ordering outside the U.S., and has no U.S.-based agents with contract authority.
In contrast, many real-world cases fail this test. Examples include sellers whose U.S. warehouses also handle returns, inventory control, bundling, or customization; sellers whose U.S. agents process orders or liaise with customers; or sellers with subsidiaries or American representatives that handle sales, pricing, or customer interactions. In such cases, the combination of warehouse use + U.S. activity often undermines the treaty-based exemption, creating PE and thus U.S. tax liability.
Additionally, for sellers from non-treaty countries, or those unable to satisfy the “resident / qualified person” requirements under the treaty (e.g., Limitation-of-Benefits provisions), treaty relief is simply not available.
Key Takeaways: How Foreign Sellers Should Think About Treaty Strategy
-
A tax treaty can offer powerful protection, reducing – or even eliminating – U.S. federal income tax on business profits, provided the seller qualifies under the treaty and limits U.S. activities to “storage/delivery only.”
-
The warehouse exception is narrow. Once you move beyond simple storage and delivery – e.g. returns processing, order fulfillment tasks, active sales or marketing – the PE risk increases substantially.
-
Dependent agents and U.S. subsidiaries are major risk factors. If a U.S. agent has any authority to negotiate or conclude contracts, or acts in a non-independent manner, a PE may be triggered under the treaty.
-
Structure and documentation matter more than ever. Written contracts and clear role definitions for 3PLs / warehouses / agents are essential to defend a treaty-based position.
-
Treaty relief is not automatic. It must be actively claimed, justified, and, where required, disclosed (e.g., via the relevant forms), and may require a legal/tax opinion for defensibility.
Can a Tax Treaty Eliminate My U.S. Tax Liability?
Tax-Efficient Entity Structuring & Setup for Foreign Sellers Entering the U.S. Market
Foreign businesses selling products into the United States, particularly nonresident marketplace sellers sourcing from China, face complex U.S. tax rules that make entity choice a critical strategic decision. Selecting the right structure is not simply an administrative matter; it determines whether the business is viewed as engaged in a U.S. trade or business, whether income is effectively connected with that U.S. presence, and how profits can be repatriated efficiently.
I. Understanding U.S. Entity Classification. The U.S. tax system allows foreign-owned businesses significant flexibility under the “check-the-box” regime (Treas. Reg. §§ 301.7701-1 through 301.7701-3). This regime permits foreign entities to elect how they are classified for U.S. federal tax purposes, with options including corporation, partnership, or disregarded entity. If no election is made, the default classification applies, which can lead to unintended U.S. tax exposure.
For example, a single-member U.S. LLC owned by a foreign seller is treated as a disregarded entity by default. This classification means all U.S. activities of the LLC are attributed directly to the foreign owner, potentially triggering a U.S. trade or business (USTB) and effectively connected income (ECI) under IRC §§ 864(b) and 882. As a result, the foreign owner may be required to file Form 1120-F, report income, and pay tax – even if the LLC’s activities were intended to be passive or preparatory.
II. Choosing Between LLCs, Corporations, and Foreign Entities. The decision between using a U.S. LLC, a U.S. C-Corporation, or operating entirely through a foreign entity shapes exposure to U.S. tax, compliance obligations, and treaty eligibility.
A U.S. LLC offers operational flexibility but carries risks. A single-member LLC will automatically attribute all U.S. activities to the foreign owner unless a corporate election is made. Multi-member LLCs are treated as partnerships unless a timely election classifies them otherwise, potentially requiring complex partnership filings and withholding under §§ 1446 and 1446(f). By contrast, a U.S. C-Corporation acts as a separate taxpayer. Its activities do not automatically create USTB for the foreign parent, and treaty protections are easier to preserve when profits are repatriated as dividends.
Operating solely through a foreign entity may be optimal when no U.S. inventory is held, no employees or agents act in the U.S., and all activities in the U.S. are preparatory or auxiliary. Under tax treaties, such a foreign entity may avoid U.S. taxation if it does not constitute a permanent establishment (PE). However, once inventory is stored in U.S. warehouses or fulfillment centers, such as Amazon FBA or 3PLs, the risk of USTB and effectively connected income arises under § 864(c)(5), unless carefully structured.
III. Managing Tax Exposure with Check-the-Box Elections. The check-the-box election (Form 8832) is a powerful tool for controlling U.S. tax exposure. By electing corporate classification, a foreign-owned LLC can prevent direct attribution of USTB and ECI to the foreign owner. Timing is critical: elections may be retroactive up to 75 days, but late or missing elections may leave the default classification in force for prior periods, creating exposure to tax, filing obligations, and penalties. This makes early planning essential for new marketplace entrants.
IV. Planning for Profit Repatriation. Structuring is only part of the equation; effective extraction of profits from U.S. operations is equally important. U.S. corporations pay corporate income tax on their earnings, but dividends to foreign shareholders are subject to withholding under §§ 871(a) and 881(a). Many treaties reduce withholding rates, sometimes to as low as 5 percent. Other mechanisms, such as intercompany service fees, management fees, or licensing arrangements, can shift profits offshore, but must comply with transfer pricing rules under § 482. Improper documentation or artificial arrangements can trigger IRS adjustments, penalties, and recharacterization as constructive dividends.
Repatriation strategies must also consider the home-country tax regime. Some jurisdictions tax foreign-source dividends heavily, while others allow exemptions or foreign tax credits. Coordinating U.S. and foreign rules is essential to avoid double taxation or misaligned deductions.
V. Why Early Structuring is Critical. The ultimate tax outcome for foreign marketplace sellers often hinges on early decisions. The right structure can prevent the IRS from classifying the business as engaged in a U.S. trade or business, preserve treaty benefits, simplify compliance, and minimize repatriation costs. Conversely, default classifications or delayed elections can expose a seller to U.S. tax, multiple information filings, and penalties. Many foreign sellers accumulate years of risk before they recognize structural defects, often triggered only when an IRS inquiry or audit occurs. Implementing the correct entity structure at the outset, coupled with careful documentation and proactive elections, is the most effective method to ensure long-term tax efficiency and compliance.
Foreign marketplace sellers who deliver goods to U.S. customers face more than just the question of whether they owe U.S. taxes. Even when exposure is minimized through careful entity structuring or treaty planning, the act of conducting business in the U.S. triggers a series of mandatory compliance obligations. Failure to comply with these filing requirements can result in severe financial penalties, loss of treaty protections, or additional scrutiny from the IRS.
Compliance is not merely a technical exercise; it is a legal imperative that shapes how a business is perceived under U.S. tax law. Each form, election, and reporting requirement interacts with the others, meaning that incomplete or delayed filings can create cascading liability that compounds over time. For foreign sellers operating through U.S. LLCs, C-Corps, or directly via foreign entities with U.S. activities, understanding these obligations is crucial to maintaining operational and financial stability.
I. Federal Income Tax Reporting: Form 1120-F. A foreign corporation engaged in a U.S. trade or business must file Form 1120-F, the U.S. Income Tax Return of a Foreign Corporation. This filing serves to report effectively connected income (ECI) from U.S. operations, calculate tax liability, and establish compliance with IRS statutes. The form requires careful distinction between U.S.-source and foreign-source income, allocation of expenses, and proper application of deductions. Treasury Regulations §§ 1.882-3 through 1.882-6 provide detailed rules regarding income characterization, deductions, and loss treatment.
For many marketplace sellers, Form 1120-F is complicated by inventory held in U.S. fulfillment centers or by the use of related-party transactions. Inventory ownership, shipping responsibilities, and payment flows all affect whether income is considered effectively connected. Improper reporting may trigger IRS audits, additional tax assessments, and penalties for failure to correctly distinguish ECI from non-ECI.
II. Related-Party Reporting: Form 5472. Foreign-owned U.S. entities, including LLCs treated as disregarded entities, must file Form 5472 if they engage in reportable transactions with related parties. These forms are among the most heavily penalized in the U.S. tax system. A single missing or incomplete form can result in a minimum $25,000 penalty, with additional daily penalties if deficiencies are not corrected. Form 5472 requires comprehensive reporting of related-party transactions, including sales, services, royalties, management fees, and capital contributions.
The rationale for strict enforcement is clear: the IRS uses this information to ensure that transfer pricing rules under IRC § 482 are properly applied and to prevent nonresident taxpayers from underreporting income via intercompany arrangements. For sellers using U.S. fulfillment, logistics, or marketing providers that are related entities, Form 5472 reporting is often unavoidable, and proactive preparation is essential.
III. Partnership and Withholding Reporting: Forms 8804 and 8805. When a foreign seller operates through a U.S. partnership, additional compliance obligations arise. Form 8804 is used to report the withholding tax on effectively connected taxable income allocated to foreign partners, while Form 8805 reports the specific income and withholding for each foreign partner. These filings are mandated under IRC §§ 1446(a) and 1446(f), and penalties for late or incorrect filings can be substantial.
For e-commerce sellers structured as partnerships or as multi-member LLCs treated as partnerships, these forms are critical. Even minimal miscalculations can trigger withholding deficiencies, interest, and penalties, complicating both current-year compliance and long-term treaty planning.
IV. Treaty-Based Filing and Disclosure: Form 8833. Foreign sellers seeking relief under U.S. tax treaties must file Form 8833 to disclose treaty-based positions. This form allows the IRS to evaluate claims of reduced withholding rates, avoidance of USTB characterization, or exemption from certain taxes. However, treaty protection is not automatic; filing Form 8833 is often the only way to formally assert the position and provide a defensible record. Failure to submit the form when claiming treaty benefits can result in denial of relief and retrospective taxation.
Treaty-based filing requires an accurate understanding of home-country residency, the permanent establishment standard under the treaty, limitation-of-benefits clauses, and applicable income sourcing rules. Each element must be documented, substantiated, and aligned with operational reality. Misstatements or omissions on Form 8833 are treated seriously by the IRS, and can lead to audits, penalties, or treaty denial.
V. Why Proactive Compliance Matters. The U.S. tax system treats compliance not as optional but as a foundation for legal recognition of business arrangements. Proper filings signal good faith and transparency to the IRS, reduce audit risk, and preserve treaty protections. Conversely, noncompliance can generate cascading penalties, compound interest, reputational risk, and the risk of enforcement actions.
For foreign marketplace sellers, compliance planning should begin even before the first sale. Understanding which forms apply, the timing of their submission, the documentation required, and the interaction between multiple filings allows businesses to operate confidently. For example, a seller with a foreign parent, a U.S. LLC, and inventory in Amazon FBA warehouses must coordinate Form 1120-F, Form 5472, and Form 8833 filings to ensure that income is accurately reported, treaty benefits are asserted, and penalties are avoided.
Ultimately, inbound U.S. tax compliance is not merely a regulatory requirement; it is a strategic tool. Proper compliance allows foreign sellers to operate efficiently, avoid unnecessary U.S. taxation, protect treaty claims, and safeguard profits for repatriation. Businesses that neglect these obligations risk far more than administrative inconvenience—they risk the very financial viability of their U.S. operations.
Inbound U.S. Tax Compliance & Filing for Foreign Marketplace Sellers
Tax Treaty Eligibility & Benefits Analysis for Foreign Marketplace Sellers
For foreign businesses selling products into the United States, navigating U.S. federal income taxation is only part of the challenge. Many sellers from treaty countries have a legal avenue to reduce or even eliminate U.S. tax liability through the application of bilateral income tax treaties. However, these treaties are not automatically effective and require careful analysis, proper documentation, and proactive assertion. Mistakes in interpreting treaty rules or failing to comply with procedural requirements can expose sellers to full U.S. taxation and forfeiture of treaty benefits.
I. The Role of Tax Treaties in U.S. Taxation. Tax treaties are bilateral agreements between the United States and foreign countries, generally modeled on the OECD Model Tax Convention. They aim to prevent double taxation and provide certainty to cross-border taxpayers. For foreign marketplace sellers, treaties primarily affect two areas: determining whether a U.S. trade or business exists for treaty purposes and reducing withholding tax rates on certain types of income, including dividends, interest, and royalties.
Unlike the domestic U.S. standard for a trade or business – can be triggered by minimal or preparatory activities – most treaties impose a higher threshold. Article 5 of the OECD Model and most U.S. treaties define a “permanent establishment” (PE) as a fixed place of business through which the business is wholly or partly carried on. Only if a foreign company has a PE does the United States gain the right to tax its business profits. This distinction is critical: many sellers who would meet the USTB/ECI standard under domestic law may fall below the treaty-defined PE threshold and thus avoid U.S. federal taxation.
II. Permanent Establishment Tests and Operational Realities. In practice, determining PE is not purely theoretical. The presence of warehouses, fulfillment centers, employees, or agents can trigger U.S. taxation if these activities rise above the “preparatory or auxiliary” level described in most treaties. Storage, display, and delivery of goods are generally excluded from PE characterization, but once U.S.-based personnel engage in contract negotiation, order confirmation, marketing, or returns processing, the IRS may consider the foreign enterprise to have a dependent-agent PE.
Foreign sellers relying on tax treaties must align operational realities with treaty language. For example, a seller using Amazon FBA must ensure that the warehouse or 3PL acts strictly as an independent provider of storage and fulfillment services, without authority to conclude contracts on the seller’s behalf. Documentation of these limitations, including service agreements and operational policies, is essential to substantiate the treaty position.
III. Limitation-of-Benefits Clauses and Eligibility Requirements. Even when a foreign seller has no PE, treaty benefits are contingent on satisfying the Limitation-of-Benefits (LOB) provisions. The LOB rules exist to prevent treaty shopping and require that the entity be a “qualified person” resident in the treaty country, with sufficient substance and economic activity in that jurisdiction. Compliance with LOB provisions often necessitates detailed analysis of ownership structure, activities in the home country, and the nature of business operations. Failure to satisfy LOB requirements can render a treaty claim invalid, leaving the seller fully exposed to U.S. taxation.
IV. Reduced Withholding Rates and Claim Filing. Tax treaties often provide reduced withholding rates on specific types of income. Without treaty claims, U.S. withholding on dividends, interest, or royalties is generally 30 percent under §§ 871(a) and 881(a). By claiming treaty benefits, these rates may drop to as low as 0–15 percent, depending on the country and type of income.
Claiming these benefits requires procedural compliance, typically through filing Form 8833 to disclose the treaty-based position. Accurate preparation ensures that treaty benefits are recognized and defensible in the event of IRS inquiry. It also protects against retrospective assessment of withholding tax. Misstatements or incomplete disclosure can result in denial of treaty benefits and the imposition of full statutory withholding, potentially creating cash flow and compliance complications for the seller.
V. Why Legal Guidance is Essential. Navigating tax treaty benefits requires a combination of legal analysis, operational review, and careful documentation. Even minor errors in interpreting treaty provisions, assessing PE exposure, or substantiating LOB qualifications can convert an otherwise tax-efficient operation into a fully taxable U.S. presence. Given the complexity of modern e-commerce and the prevalence of U.S.-based fulfillment networks, sellers cannot rely on a simplistic interpretation of treaty rules.
Effective treaty planning for foreign marketplace sellers involves reviewing operational workflows, evaluating the roles of U.S. warehouses and agents, confirming home-country residency and substance, and preparing formal opinions or filings that substantiate the treaty claim. When done correctly, tax treaties can dramatically reduce U.S. tax exposure and improve overall business profitability. When done incorrectly, they offer little protection, leaving the seller vulnerable to tax liability, penalties, and interest.
Foreign businesses selling products into the United States face a unique set of tax challenges. Nonresident sellers, especially those sourcing goods from China and selling via Amazon, Walmart, TikTok Shop, or other U.S.-based marketplaces, often encounter complex federal and state tax rules that can create unexpected liability if not addressed proactively. At [Your Firm Name], we provide specialized legal guidance to help foreign sellers navigate the U.S. tax landscape efficiently, minimize exposure, and remain fully compliant.
Our services are designed for businesses at every stage of U.S. market entry – from initial risk assessment and entity structuring to treaty planning and ongoing compliance. Below is a breakdown of the key challenges we address and how we help solve them.
I. U.S. Tax Footprint & Nexus Risk Assessment. Before a foreign business makes its first U.S. sale, it is critical to understand whether its operations create a U.S. trade or business (USTB) or effectively connected income (ECI). The distinction determines federal income tax exposure and reporting obligations.
Foreign sellers often underestimate how activities such as storing inventory in Amazon FBA warehouses, using third-party logistics providers, or having U.S.-based personnel travel to the U.S. can trigger taxable presence. Under IRC §§ 864 and 882, even seemingly minor operations may constitute a USTB, exposing the seller to federal income tax and a range of filing requirements.
We provide a comprehensive risk assessment, evaluating federal and state nexus based on operational activities, revenue sourcing, and physical presence. By identifying areas of potential exposure early, we help sellers make informed decisions about entity choice, operational workflow, and treaty planning. This proactive approach minimizes the likelihood of unexpected IRS assessments or state tax obligations and provides a clear roadmap for U.S. market entry.
II. Inbound Tax Compliance & Filing. Once a U.S. presence exists, compliance becomes mandatory. Many foreign sellers encounter filing obligations that are not intuitive but carry severe penalties. These include Form 1120-F for reporting effectively connected income, Form 5472 for related-party transactions, Forms 8804/8805 for partnerships, and Form 8833 for treaty-based positions.
Incorrect or late filing can result in penalties exceeding $25,000 per form, along with interest and possible audit scrutiny. For example, failure to file Form 5472 for a disregarded entity triggers immediate penalties, while incomplete Form 1120-F filings can invite IRS inquiry into income characterization and deductions.
We guide clients through each compliance obligation, ensuring accurate reporting, timely submission, and proper documentation. Our service not only protects sellers from penalties but also preserves treaty benefits and enhances operational transparency with the IRS.
III. Tax-Efficient Entity Structuring & Setup. The legal structure of a foreign seller’s U.S. operations fundamentally determines tax exposure, compliance complexity, and long-term profitability. Choosing between a U.S. LLC, a U.S. C-Corporation, or operating entirely through a foreign entity requires a careful understanding of default classification rules, check-the-box elections (Treas. Reg. §§ 301.7701-3), and permanent establishment considerations under both domestic law and bilateral treaties.
For instance, a single-member LLC treated as a disregarded entity may inadvertently attribute all U.S. activity to the foreign parent, triggering ECI and filing obligations. A U.S. corporation, by contrast, creates a separate taxpayer, shielding the foreign parent while allowing for treaty-based relief on dividend repatriation. Operating solely offshore can work if the business avoids U.S. warehouses or agents, but even minimal U.S.-based activity can create exposure under § 864(c)(5).
We help foreign sellers design and implement optimal structures that align operational realities with tax law. This includes selecting the right entity type, filing timely classification elections, planning profit repatriation, and mitigating risks associated with USTB, ECI, and state nexus. Proper structuring is not only a compliance measure – it is a strategic tool for efficiency, treaty eligibility, and long-term growth.
IV. Tax Treaty Eligibility & Benefits Analysis. Many foreign sellers from treaty countries can significantly reduce U.S. taxation, but claiming treaty benefits requires careful analysis. Tax treaties define “permanent establishment,” limit U.S. taxing rights, and reduce withholding rates on dividends, interest, and royalties. Misinterpretation or failure to substantiate a claim can result in forfeiture of these benefits.
We analyze corporate structures, operational workflows, and treaty provisions to determine eligibility. This includes assessing whether U.S.-based warehouses or service providers constitute a PE, confirming home-country residency, and reviewing Limitation-of-Benefits (LOB) clauses. For treaty-eligible sellers, we prepare formal filings, including Form 8833, to assert treaty positions confidently and defensibly. Proper treaty planning can reduce or eliminate U.S. tax on profits, enhance cash flow, and protect long-term operations.
V. Strategic U.S. Tax Planning & Risk Mitigation. Beyond compliance and structuring, we help foreign sellers integrate all aspects of U.S. taxation into a forward-looking strategy. This includes managing state income and sales tax obligations, coordinating related-party transactions under § 482, planning intercompany payments, and designing efficient profit extraction mechanisms. Our approach ensures that every U.S. sale is evaluated not only for legal compliance but also for its financial impact.
By combining risk assessment, entity structuring, treaty planning, and compliance management, we provide a holistic service that transforms U.S. tax from a source of uncertainty into a strategic advantage.
My Services. At my firm, we offer comprehensive legal services for foreign marketplace sellers, including:
1. U.S. Tax Footprint & Nexus Risk Assessment – Identifying whether your business activities create U.S. taxable presence and evaluating federal and state risks.
2. Tax-Efficient Entity Structuring & Setup – Designing U.S. or hybrid corporate structures to minimize U.S. tax exposure, manage ECI, and enable treaty protection.
3. Tax Treaty Eligibility & Benefits Analysis – Reviewing treaties, permanent establishment exposure, and Limitation-of-Benefits requirements to reduce withholding tax and protect profits.
4. Inbound U.S. Tax Compliance & Filing – Preparing and filing all required federal tax forms, including Form 1120-F, 5472, 8804/8805, and 8833, ensuring accuracy and penalty avoidance.
5. Strategic U.S. Tax Planning & Risk Mitigation – Coordinating state and federal obligations, transfer pricing, intercompany flows, and profit repatriation to optimize long-term efficiency.
Each service is tailored to foreign sellers entering the U.S. marketplace, providing clarity, compliance, and confidence. Our goal is to transform complex U.S. tax rules into a predictable, manageable, and strategic framework for your business growth.
My Services
Viacheslav Kutuzov | International & U.S. Taxation Expert
We minimize your taxes domestically and internationally...
Viacheslav Kutuzov
VIACHESLAV KUTUZOV, Esq.
International and U.S. Taxation Expert
New York Tax Attorney & Counselor-at-Law (6192033)
55 Broadway, Floor 3, New York, New York 10006
We apply international standards of confidentiality
ISO / IEC 27001 Information security management
