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I just came across some US tax forms for foreign entities like W-8BEN-E and 1040NR which made me ask this question.

Suppose a company called Cool Stuff Ltd. runs some sort of online business serving customers all over the world. This could be paid content subscriptions, dating, posting ads/classifieds, hosting, VPN — all sorts of stuff that is performed by software accessible by customers over the Internet.

The company is not present in the US in any way: no incorporation, no offices, no employees, no web hosting, the shareholders and directors are not related to the US at all.

People in the US can access the company's website/app and buy services in the company's home country currency. The company may not even care or take note of where they are from.

Technically, if any single John Doe from the US decides to buy a subscription, he will make the company "receive" "income" "from U.S. sources that consists of" "Compensation for, or in expectation of, services performed" (W-8BEN-E):

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Does that really trigger the company's obligation to fill US tax forms and pay tax in the US? If so, is there any threshold i.e. minimum income that triggers the obligation?

  • "The company is not present in the US in any way" cannot be true if "... it serves US customers". – Nij Jan 26 at 4:21
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    @Nij the company's website/app simply does not reject visitors from the US. Does this make it present in the US? – Greendrake Jan 26 at 4:23
  • Not actively rejecting customers is a very different thing from serving them. Which one do you mean? – Nij Jan 26 at 4:25
  • @Nij I mean that, if a visitor wants to pay for a service, the company will accept the money and provide the service, and may not even look at where the visitor/customer is from. – Greendrake Jan 26 at 4:27
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    @Nij Well, if you provide an authoritative source of that statement, it would be a good answer. – Greendrake Jan 26 at 4:39
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It is more complicated. From Wikipedia

“The United States has income tax treaties with over 65 countries. These treaties reduce the chance of double taxation by allowing each country to fully tax its citizens and residents and reducing the amount the other country can tax them. Generally the treaties provide for reduced rates of tax on investment income and limits as to which business income can be taxed. The treaties each define which taxpayers can benefit from the treaty.”

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    I understand that the company may be eligible to tax deduction home if it pays some tax in the US. But this is not what the question is about — which is simply whether it has to pay tax in the US in the first place. – Greendrake Jan 26 at 8:31
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I believe it would be useful to clarify some things first:

There is no concept of "alien entities" in tax law (and by "tax" I mean specifically US federal income tax - as opposed, for example, to US federal estate tax or state and local tax law).

For individuals, there are two tax categories: citizen or alien. Alien individuals are subdivided into resident aliens and nonresident aliens.

Legal entities can (generally) be either "domestic" or "foreign". It depends in large part on the legal form of the entity. If it is a "corporation" established under laws of one of the US states, it's treated as a domestic corporation. If it's an entity established elsewhere, there's a whole sub-discipline dedicated to determining whether that entity is treated as a "corporation" for tax purposes. If it is, it is considered a foreign corporation. (I will pass over partnership/LLC, other passthrough/transparent entities, trusts, etc. - you will need a PhD to deal with those...)

So focusing on nonresident aliens and foreign corporations - these are generally subject to tax in one of two situations: if they have a "US trade or business" or not.

If they do have a "US trade or business" (that's a 2nd PhD right there), they have to determine if they have income which is "effectively connected" with that "US trade or business" (yet another PhD is required for that). If that exists - the foreign corporation/nonresident alien is subject to tax on that income. And there are industry-specific rules on top of that: taxing a banking business is not the same as taxing a game development business.

If there is no "US trade or business", a foreign corporation/nonresident alien is subjet to tax on certain categories (not all) of "US source income" (a mini PhD).

And, yes, if a tax treaty exists between the US and the "country of residence" of the foreign corporation/nonresident alien (yup!), these results will likely change.

This is a long and winding way of saying that there is no way to answer a hypothetical question like this: it's a really complex issue, which can't be intuited or answered from some sort of first principles.

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  • Isn't the given hypothetical scenario specific enough to give a yes or no answer? – Greendrake Jan 26 at 21:30
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    @Greendrake - Not really; just start with the fact that we are dealing with "some online business"; that, in and of itself, is vague enough to stop any further discussion (in my opinion), – Jack Fleeting Jan 26 at 23:33

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