With Detroit serving as a border crossing into Canada, I receive a lot of inquiries from persons out of the country trying to do business in the U.S., and specifically in Michigan. The first question that arises is whether a Canadian (or a foreign national/non-citizen) may start or invest in a business in the United States? If so, how do they organize, and what are the tax implications?
A foreign national or non-citizen may start a business in the U.S., organizing as either a corporation (C-Corp) or a limited liability corporation (“LLC”). S-Corps are exclusive to citizens and permanent residents. The process for forming a corporation or LLC in the U.S. as a foreigner is similar to the process for a U.S. resident and doesn’t require a green card or visa to do so.
Having said that, doing business in the U.S. does not entitle one to live in the U.S. While a foreign citizen may be a corporate officer and/or director, they may not work in the United States or receive a salary or compensation or services provided in the U.S. unless the foreign citizen has a work permit. Consult with an immigration specialist on how to obtain residency in the U.S. as a non-citizen business owner or foreign national.
Nonresident alien individuals that do business in the U.S., will be subject to taxation. There are two methods of U.S. taxation on U.S. sourced income:
- Effectively connected income (“ECI”) is income earned from running a business in the U.S. or is personal service income (e.g. wages or self-employment income).
- Fixed or determinable, annual, or periodic (“FDAP”) income is passive income (think interest, dividends, rents or royalties). It’s typically taxed at a flat 30% rate.
Nonresident alien individuals must file and pay taxes using Form 1040NRor Form 1040NR-EZ.If an IRS ITIN is required, it can be obtained using Form W-7. The IRS also recommends using Form SS-5to obtain a social security number. A nonresident alien or foreign corporation is taxed on a net basis for income effectively connected with the conduct of a trade or business in the U.S. This incomeis subject to income tax at regular rates – the same graduated rates for U.S. citizens.
The U.S. has income tax treaties with a number of foreign countries, including Canada. The income tax treaty between the U.S. and Canada is reciprocal – the same rules apply to both countries, and the benefits are provided on the basis of residency.That is, a Canadian resident who claims the benefit of the treaty and who has income from the U.S. will often pay less income tax to the U.S. than if no treaty existed. Perhaps more importantly, Article XXIV of the treaty eliminates double taxation by providing a foreign tax credit for taxes paid to the U.S. on U.S. sourced income, which then goes against income taxes to be paid in Canada on that U.S. income.
Notably, if a foreign corporation or LLC is incorporated or organized elsewhere but doing business in Michigan, it must obtain a Certificate of Authority to do so. Once a foreign entity has been granted the right to transact business in the state, it holds the same rights and privileges as a domestic entity.
If you are interested in moving forward with starting a business as a foreign national or non-resident, or accepting an non-resident investor in a U.S. Company, please contact me for more information on how we can assist you.
Special thanks to research conducted by Dalton & Tomich, PLC law clerk, dual U.S./Canadian J.D. Candidate, Juliana Ramkissoon.
Taxation of Nonresident Aliens. Accessed at: https://www.irs.gov/businesses/taxation-of-nonresident-aliens-1.
Taxpayer Identification Numbers (TIN). Accessed at: https://www.irs.gov/individuals/international-taxpayers/taxpayer-identification-numbers-tin.
¶ C1.04 TAXATION OF INCOME EFFECTIVELY CONNECTED WITH U.S. TRADE OR BUSINESS, 2000 WL 530194, 1.
Department of the Treasury, Internal Revenue Service, Information on the United States-Canada Income Tax Treaty, Publication 597, (2015). Accessed at: https://www.irs.gov/pub/irs-pdf/p597.pdf.
United States – Canada Income Tax Convention. Accessed at:https://www.irs.gov/pub/irs-trty/canada.pdf.
Mich. Comp. Laws Ann. §§ 450.2002. and 450.5003.