How to Get US Tax Benefits for Your Foreign Business
While taxes are always frustrating for business owners, the United States offers favorable tax laws and other regulations compared to many other countries. If you're a foreign founder, you may be wondering how to take advantage of tax benefits in the US.
In this article, we'll explain some key tax concerns for international businesses and explain how to minimize your tax burden. Note that you will need an American LLC to get started. If you don't have an American business presence, click here to start the incorporation process with Firstbase.
TL;DR
- Foreign founders can reduce or avoid US taxes if business activities occur outside the US.
- Owning a US LLC doesn’t mean paying US taxes, unless you have a US presence (e.g., employees or offices).
- Use tax treaties (via Form W-8BEN/E) to lower withholding rates on dividends, interest, and royalties.
- Apply the portfolio interest exemption to eliminate withholding on qualifying cross-border loans.
- Use the IC-DISC structure to reduce export taxes by up to 17% through commission-based income routing.
- LLCs are pass-through entities; no corporate tax if operations stay abroad.
- Still need to file Form 5472 for transparency, even with zero tax due.
- Use legal structures smartly to optimize global tax obligations.
Minimizing Taxes as a Foreign Founder
If US operations mean US taxes, doesn't that mean that you'll end up having to pay American taxes?
Not exactly.
For example, you may own a company that provides a service such as software development or property management. Even if you have US clients, you can still avoid taxes as long as you operate out of another country. Even if you open an LLC and receive payments in USD in a US bank account, you still would have no need to worry about US taxes, as the company has no offices or dependent agents in the US.
Alternatively, you could use a third-party service provider that will package and ship products to the US. Amazon, for example, can help foreign entrepreneurs sell products into the US through their “Fulfillment by Amazon.” All operations are managed by foreigners, but products are packaged and shipped to customers in the US thanks to Amazon.
Although Amazon assists this company, it is not solely working with the company, as it works with numerous clients and is not a dependent agent but rather an independent agent. Therefore, the company will not be subjected to US taxes.
Even if you don't have to pay any taxes, foreigners still need to file Form 5472 to disclose financial information to the IRS. Of course, you will still be responsible for paying taxes under the laws of the country where your business operates. Check local tax regulations to make sure you're operating compliantly in both locations.
Here are some more ways to get US tax benefits for your foreign business:
1. Leveraging US Tax Treaties to Cut or Eliminate Withholding
More than 60 US income tax treaties let foreign owners trim the default 30% withholding on dividends, interest, royalties, and some service fees, often to 15%, 5%, or even 0% if no permanent establishment exists.
Each treaty’s ‘Articles 10–12’ prescribe the exact rate; founders simply attach the relevant article number and rate to Form W-8BEN / W-8BEN-E so the payer can withhold at the reduced amount. Remember the limitation-on-benefits clause: your company must be a bona fide resident of the treaty country and not a conduit for third-state investors.
2. Portfolio Interest Exemption: Zero Withholding on Cross-Border Loans
If your US subsidiary borrows from its foreign parent or outside investors, structure the debt as “portfolio interest” under IRC §871(h) and §881(c). Qualifying interest - paid on registered debt, held by lenders owning <10% of the voting stock, escapes US withholding entirely.
That means the lender receives gross interest, while the U S. borrower still deducts it, lowering combined tax cost.
File Form W-8BEN-E identifying the exemption code and keep the debt in registered form to preserve the benefit.
3. IC-DISC Structure: Slash Export Taxes with a Commission Company
Manufacturers or software firms selling US-made products or code abroad can form an Interest-Charge Domestic International Sales Corporation (IC-DISC) under IRC §§991–997. If at least 95% of its receipts are export-related, the IC-DISC pays 0% federal tax on the commission it earns from the operating company. IC-DISC can save up to 17% on export income taxes
The operating company deducts that commission at ordinary rates, then the IC-DISC distributes the profit as a qualified dividend to foreign shareholders, taxed at 20% (+ 3.8% NIIT) instead of up to 37%.
When structured correctly, the rate arbitrage often saves 10-15 cents on every export dollar, without altering day-to-day operations.
How Do LLCs Work?
LLCs, or limited liability companies, are known as pass-through entities. This means that LLC income is taxed as the personal income of the LLC's members — there are no corporate taxes applied to the LLC itself.
As a foreign founder, you can use an LLC to sell to US customers without paying US taxes on that income. However, this only works if your company's operations take place outside the US. Let's take a closer look at the details.
First, the individual and company must reside and conduct all business activities outside the US. You will only have to pay American taxes if you have a presence within the country. For example, let's say you have an American employee or subsidiary. Since they are operating in the US, income from their activities will be subject to US taxes.
The main alternative to an LLC is a C-Corp, which comes with more regulatory requirements but also enables the issuing of equity. Click here to learn more about the differences between LLCs and C-Corps.
Takeaways
While tax laws are inevitable, understanding how to use them to your advantage is a critical skill for any entrepreneur. These tips will help you minimize US taxes even after creating an American LLC.
Ready to get started? Hit the button below to begin the incorporation process. We'll help you every step of the way and continue to provide support for compliance, mail, accounting, and other business operations.
P.S. Nothing in this article should be construed as legal advice. Consult a legal or tax professional if you have any questions about your tax obligations.