US Tax for Chinese Founders Running US LLCs

The US-side position for a China-resident-owned US LLC matches the general non-resident case: with the LLC operated from China and no US office, employees, or dependent agent, there is generally no US trade or business, no effectively connected income, and so no US federal income tax on the business profits — though Form 5472 with a pro-forma Form 1120 is still due (USD 25,000 penalty per failure under IRC Section 6038A). US-source FDAP income is the exception; the US-China treaty (signed 1984, effective 1987) caps US withholding on dividends and interest at 10%.

The China side is where the burden sits, and the load-bearing variable is how China characterises the LLC. China taxes individuals domiciled in China — a household-registration / habitual-residence test, not mere physical presence — on worldwide income under the 2019 IIT Law. If the disregarded LLC is treated as transparent, its profits are the owner's overseas business income, taxed currently on the 5%–35% operating-income schedule. If treated as an opaque foreign company, the profits sit outside China until distributed as a 20% dividend — unless the individual anti-avoidance / CFC provision in IIT Law Article 8 deems a distribution where the entity bears an obviously low tax burden and withholds profit without commercial reason. (This is distinct from the enterprise-level CFC rule in EIT Law Article 45 / Caishui [2009] No. 84, which uses a 12.5% threshold and governs corporate shareholders.) A foreign tax credit is available, but per-country and per-category with a five-year carry-forward — and where the LLC pays no US tax, there is nothing to credit, so the full burden lands in China. The transparent-versus-opaque question is genuinely unsettled in Chinese practice and is the highest-risk item for a China-resident owner; the SAFE Circular 37 ([2014] No. 37) foreign-exchange registration before capital contribution is a separate, parallel obligation.

**Sources cited above:** IRC Sections 864(b) / 882 (ECI), Section 6038A (Form 5472), US-China Income Tax Treaty (1984, effective 1987) Articles 7 and 9; PRC IIT Law (2019) Articles 1 and 8, EIT Law Article 45 / Caishui [2009] No. 84 (enterprise CFC, 12.5%), MOF / SAT Announcement [2020] No. 3 (foreign-income FTC), SAFE Circular [2014] No. 37. Last verified 2026-06-01.