Hi,

An individual who is a citizen and tax resident of another country (non-US), is a non-resident alien from the perspective of US taxation,
- zero days in US (substantial presence test),
- never earned taxable US income till now,
- has never elected to be taxed as a US resident,
- no assets\permanent business presence in US,
- no income from US trade or business,
- is not a US citizen,
- is natural citizen of his\her home country and is consistently reporting income and paying taxes there.

If this individual starts a sole proprietorship in their home country, to design and supply virtual goods (software, apps) for offer on sale through online marketplaces which are located in the US. These marketplaces would pay him\her percentage royalties (i.e. income not connected with a US trade or business) on the sales made. By default, 30% tax is withheld on such royalty payments made to persons\entities outside US if W8BEN is not supplied to these marketplaces. To be on the safer side, some marketplaces even insist on a non-SSN US TIN (e.g. ITIN\EIN) in W8BEN if tax withholding has to be reduced.

In such a scenario, if this individual obtains an EIN from the IRS for his\her sole proprietorship (citing compliance with tax treaties as the sole reason in the application Form SS-4), with the place of business listed as his\her country of citizenship, would the individual still be required to file US tax returns for the proprietorship as he/she has now obtained a US TIN (EIN) ?

To avoid having to deal with additional reporting\return filing requirements, if he/she desires to get the EIN account closed and the number made inactive (no income yet as the business is yet to get off the ground), would the IRS insist on a pre-closure return even for such a still-born business ?

On the other hand, if this individual's proprietorship business were to start producing and supplying virtual goods and begins earning royalties, then what all returns would need to be filed with the IRS, if any ? Form 1040NR (nra) ? + Schedule C (sole.prop) ? + Schedule NEC ? +..?

The individual was about as US tax savvy as a neanderthal about quantum physics, but possibility of additional red tape (not the electrical insulation kind) can make even hardened neanderthals into worried quanti-vores :-)

A Confused Neanderthal now having to learn learn quantum physics!

To add to the above questions, total from income from all US sources is currently zero! However, if business actually gets off the ground and begins earning money, would US filing be needed then ?

Establishing the EIN gives the paying U.S. companies reason to originate Form 1099-MISC for the payments made, UNLESS Form W-8BEN is submitted clearly claiming the treaty exemption.

Once the IRS receives the Form 1099-MISC, they WILL assume the company is U.S.-based and it would be up to YOU to convince them otherwise. I had to refer a Chinese tax client to a Los Angeles tax attorney to fight an attempt by the IRS to collect taxes because we could NOT convince them that the company operated solely in China due to a Form 1099-MISC sent to them with a Utah address.

This being the case, an ITIN may be the better solution if the U.S. company demands some form of tax ID number, even given the current difficulty is applying for such an ITIN.

Thanks. This helps.

Glad to help!