Tax Treaty

A tax treaty is a deal between two governments about who gets to tax what. The United States has income tax treaties with dozens of countries, including most of Europe, Canada, Mexico, Japan, India, and Australia. Each treaty divides taxing rights between the two countries, sets maximum withholding rates on cross-border payments, and aims to stop the same income from being taxed twice by both governments.

For a non-resident founder, treaties help in two main ways. First, they cut withholding on FDAP income: the default 30% US rate on dividends, royalties, and interest often drops to 15%, 10%, or zero, depending on the treaty and income type. On $20,000 of royalties, a treaty cut from 30% to 10% keeps $4,000 in your pocket. You claim these rates by giving the payer Form W-8BEN. Second, treaties protect business profits: most say the US may tax them only if you have a permanent establishment there, which many remote founders do not.

Treaties have fine print. Most contain limitation on benefits rules that stop people from routing income through treaty countries just for the tax break, and you generally need to be a tax resident of the treaty country to qualify. Notably, some countries where founders often live or incorporate, such as the UAE, Singapore, and Brazil, have no US income tax treaty at all, so the default rules apply in full.

Treaties never cancel information reporting. A treaty may reduce your tax to zero, but your foreign-owned single-member LLC still files Form 5472 with its pro forma Form 1120 by April 15, and a multi-member LLC still files Form 1065 by March 15, with Forms 8804 and 8805 when foreign partner withholding applies. Treaty positions on a return often require disclosure on Form 8833; the section 6038A penalty of $25,000 applies to missed 5472 filings regardless of treaty benefits.