5 Key Things Foreigners Must Know Before Doing Business in the U.S. (Plus a Bonus)

Thinking about starting a business in the U.S. as a non-citizen or non-resident? Whether you're a digital nomad, investor, or global entrepreneur, there are several crucial tax and legal concepts you need to understand before diving into the U.S. market.

At BizBud, we help foreigners, small businesses, and digital nomads navigate the U.S. tax system, set up businesses properly, and save thousands in taxes. In this article, we’ll break down the five (plus a bonus) most important things you need to know before doing business in the United States.

1. Understand Effectively Connected Income (ECI)

Effectively Connected Income (ECI) determines whether your U.S. income is subject to U.S. tax. If your income is sourced from U.S. activity, then you’ll likely owe U.S. tax and must file a 1040-NR (non-resident) tax return or a U.S. business tax return if operating through an entity.

✅ Example: You're a marketing agency based in Argentina. If you set up a U.S. LLC and provide services for the U.S. LLC from outside the U.S., you may avoid ECI altogether—meaning no U.S. tax owed. And if you don’t transfer that money back to Argentina or your home country, then (depending on your countries rules) you won’t owe any tax on that income to any country. Amazing!

🚫 But be careful—if you physically work in the U.S., store inventory in U.S. warehouses, or have a U.S. office or employees, you could trigger ECI and create a U.S. tax obligation. That means don’t travel to the U.S. to meet with suppliers or potential clients. You can still enter the U.S. for tourism purposes but don’t stay too long as to trigger tax residency.

2. Avoid the Substantial Presence Test (183-Day Rule)

If you're physically present in the U.S.183 days in the past 3 years, you could become a U.S. tax resident, even without a green card.

How the 183 Day Substantial Presence Test is calculated:

• 100% of the days you’re in the U.S. this year

• 1/3 of the days last year

• 1/6 of the days two years ago

Let’s say you were in the U.S. for 90 days in 2025, 90 days in 2024, and 90 days in 2023, the total would be:

• 90 (2025) + 30 (1/3 of 90 in 2024) + 15 (1/6 of 90 in 2023) = 135 days
  
  

Since that’s under 183 days, you would not be considered a U.S. tax resident in this example.

📌 Tip: Stay under 120 days per year for three consecutive years, and you’ll typically avoid triggering tax residency.

🛂 Exceptions apply to some visas (e.g., student or teacher visas), so always check based on your visa type.

3. Watch Out for FDAP Income (Passive U.S. Income)

Fixed, Determinable, Annual, or Periodic (FDAP) income is typical passive income from investments foreigners have in the U.S. It includes passive income like:

• U.S. dividends

• Interest

• Royalties

• Rental income

This income is subject to a 30% withholding tax unless reduced by a tax treaty with your home country.

💡 Example: If you're a U.K. resident, the U.S.-U.K. treaty may reduce this to 15%.

🧾 If too much was withheld, you can often file a 1040-NR to request a refund. Alternatively, you may want to trigger ECI (e.g., for real estate) to file a tax return and deduct expenses—often lowering your tax bill significantly. It’s a tax not many foreigners are aware of and don’t plan for, so make sure you are ready for it before making investments into the U.S.

4. FERPTA: Foreign Investment in U.S. Real Estate

FERPTA (Foreign Investment in Real Property Tax Act) applies when foreigners sell U.S. real estate.

The IRS requires a 15% withholding on the entire sale price—not just the profit.

🏠 Example:

• Buy property for $800,000

• Invest $100,000 in renovations

• Sell for $1,000,000

Even though your gain is only $100,000 in this example, FERPTA requires withholding $150,000 (15% of $1M). You’ll need to apply for a refund from the IRS, which could take up to a year.

🚫 Avoid this headache: Structure your real estate purchase through a U.S. corporation owned by your foreign entity. This can help you avoid FERPTA entirely. Reach out to us for if you want help avoiding this as it can be a nasty one.

5. Beware of U.S. Estate Tax for Foreigners

U.S. estate tax can apply to foreigner-owned assets (stocks, real estate, etc.) upon your death.

💔 While U.S. citizens have an $11 million exemption (as of current law), foreigners only get a $60,000 exemption.

🎯 Example: A foreign investor grows a $50,000 investment into $500,000 in U.S. stocks. IF they sell it before they die and transfer the money to their family they won’t owe any U.S. tax (if they owe tax in their own country depends on the country). But IF they don’t sell it and they die, their heirs could owe up to 40% estate tax. So in this example it would be, up to 40% on $440,000 the heirs would have to pay before receiving the money.

✅ Pro tip: If you structure the investment account properly you can avoid this estate tax for your loved ones. Set up your investment accounts through an LLC, trust, or corporation—not in your own name—to avoid estate tax exposure. Planning ahead can save your heirs thousands. 

Bonus Tip: No Capital Gains Tax for Foreign Investors

Here’s some good news! If you're a non-U.S. person, you typically pay no U.S. capital gains tax on the sale of U.S. stocks or securities.

📈 This makes the U.S. stock market an attractive investment option for foreigners as you could owe no tax and if you don’t transfer the gains to your home country (depending on the country) you won’t owe any tax anywhere on that income. The DREAM scenario!

Final Thoughts: Structure It Right from the Start

Doing business in the U.S. as a non-resident can be incredibly tax-advantaged—if you set it up right. Whether you're launching an LLC, buying real estate, or investing in stocks, understanding ECI, FDAP, FERPTA, estate tax, and the substantial presence rules can save you a fortune.

At BizBud, we help global entrepreneurs structure their U.S. businesses the smart way.

👉 Book a free discovery call with our expert CPAs and tax advisors to discuss your situation.

📞 We work with clients in on every continent to help them win at the tax game.