Hey guys,
Sorry for the book...please bear with me.
I've picked up another potential foreign individual client and have been melting my brain this morning figuring out what his obligations are in order to price his services.
In a nutshell, he is a resident of India and established a US LLC (of which he is the sole member) to sell widgets to customers in the US. He does not manufacture the widgets and just purchases resells them. The US LLC is disregarded, no alternative tax election was made. The US LLC is his only US source income.
I've already established that a 5472 with an 1120 proforma needs to be filed for 2017 for the US LLC. That was the easy part!
What I'm racking my brain over is whether he needs to file a 1040NR with Schedule C. He claims he was told he doesn't need to (yeah we all know how that goes) because of the tax treaty. I'm leaning toward he needs to file the 1040NR, and I'll detail why.
Based on Pub 901, only certain types of income are exempt from tax under specific scenarios. The of income types are:
-Professional services
-Teacher, professor, or researcher
-Student or apprentice
-Payments from foreign government
I confirmed all of these in the 1991 US-India tax Treaty. In the Treaty, it defines professional services as including "independent scientific, literary, artistic, educational or teaching activities as well as the independent activities of physicians, surgeons, lawyers, engineers, architects, dentists and accountants." Selling widgets clearly doesn't fall into this category.
What I think is the relevant guidance is found in Article 7, Paragraph 1 of the Treaty. It is as follows:
1. The profits of an enterprise of a Contracting State [emphasis added] shall be taxable only in that State unless the enterprise carries on business in the other Contracting State through a permanent establishment situated therein. If the enterprise carries on business as aforesaid, the profits of the enterprise may be taxed in the other State but only so much of them as is attributable to
(a) that permanent establishment;
(b) sales in the other State of goods or merchandise of the same or similar kind as those sold through that permanent establishment; or
(c) other business activities carried on in the other State of the same or similar kind as
those effected through that permanent establishment.
Because the US LLC is organized in the US and carries on business in the US, I'm reading that as the profits of the US LLC will only be taxed by the US unless it has a permanent establishment in India. Therefore, the foreign individual needs to file 1040NR with Schedule C to report the US LLC's activity.
Do you agree with my methodology?
Possible planning opportunity: late election for C Corp status would kill the 5472 obligation for 2017 and may be more beneficial depending on future projected income. I'd have to look into the ramifications of eventual wind-up though to see what those look like.