Question asked by Ravi Singh
I own a U.S. LLC and I sell products on Canadian Amazon. Article VII of the U.S. Canada tax treaty exempts profits of my U.S. LLC from income taxes in Canada. I also own entities in other countries and the management of everything is in India. What is the tax rate if I have to pay taxes?
Disclaimer: This is not tax advice. The answer below is for general purposes. Please exercise caution while making any decision based on this post or any other post on this website. This question may have been rephrased to correct some of the technical terms. The rephrased questions are often more helpful to a wider range of readers.
Article VII of the U.S. Canada Tax Treaty and U.S. LLC
Article VII of the U.S. Canada tax convention provides that the business profits of a resident of the United States are exempt from Canadian taxes unless these profits are the result of the permanent establishment.
Ordinarily, a U.S. corporation selling on Amazon in Canada can claim an exemption from Canadian income taxes using the above article if it does not have a permanent establishment (PE) in Canada. PE is further defined in Article V of the treaty in detail.
Hybrid Entity Mismatch
In the case of a U.S. LLC. that has not checked the box to be taxed as a Corporation in the United States, there are some added complications. Such an entity is a fiscally transparent or flow-through entity in the United States. If it’s a single-member LLC, it’s a disregarded entity. The same entity is not a flow-through entity in Canada. The U.S. LLC is a nonresident corporation in Canada. There comes the hybrid entity mismatch!
The U.S. Canada Treaty Benefits for U.S. LLCs
Due to the hybrid entity mismatch, Limited Liability Companies formed under the state laws of the United States require a detailed analysis to determine their eligibility for treaty benefits.
In the case of U.S. LLC, the treaty benefits are available to its members only if they are U.S. tax residents, be it a corporation or an individual. So you must look through the LLC to identify the tax residency status of each of its members. Those members who are not U.S. U.S. tax residents are subject to both corporate income tax and branch profit tax regardless if there is a PE or not.
Going back to the original question, if a single member U.S. LLC, (disregarded entity for U.S. tax purposes) is owned by an Indian tax resident, this specific entity cannot claim the benefits under the U.S. Canada Income tax convention. The effective income tax rate on such income, both corporate income tax and branch profit tax, may exceed 45% on such income. This is also applicable to any other member of the LLC who is not a U.S. tax resident, even if she is a Canadian tax resident.
If the same LLC was owned by either a U.S. Corporation or a U.S. resident alien, there is no Canadian income tax if there is no PE.
On another note, using Amazon FBA Services in Canada alone does not cause a Permanent establishment under the convention.
Corporate income tax returns for U.S. LLC must be filed in Canada in order to claim tax treaty benefits. In this situation, there are no treaty benefits available, however, a T2 must be filed.