Few numbers cause LLC founders as much vague anxiety as 30. "The US keeps 30 percent of everything!" No, it doesn't. US withholding tax hits a clearly defined class of income and leaves the rest completely alone. Once you know the map, you lose the fear and keep the money.
The basic rule: FDAP yes, active business no
US tax law splits the income of foreigners roughly into two worlds. On one side is passive US-source income, known in the jargon as FDAP: dividends on American shares, certain interest, royalties, rents. On this category the US levies a flat 30 percent withholding tax, which the payer withholds directly; the IRS describes the system in Publication 515. On the other side is active business income: your consulting fees, your software subscriptions, your agency invoices, your FBA sales. If you perform these services outside the United States, they are not US-taxable income at all, so there is simply nothing for anyone to withhold 30 percent from. In everyday life, the typical service LLC never touches withholding tax.
Where it gets real: the four classics
First, dividends. If you trade US shares through your LLC, your broker withholds tax on dividends. The rate depends on your country of residence: 30 percent without a treaty, often 15 percent with a double tax treaty; the IRS treaty tables give the overview. Important: for a transparent LLC, the treaty that counts is the one of your country of residence, not the LLC's state of formation. A Wyoming address does not make you eligible for treaty benefits.
Second, interest. Many kinds of interest are exempt from withholding anyway under the portfolio interest exemption, and so is bank interest. This area is friendlier than its reputation.
Third, royalties. Royalties from the US, for example from publishers, platforms or Amazon KDP, are the classic withholding case: 30 percent without a treaty, often much less with one, and always the maximum rate without the correct form.
Fourth, US real estate income, a chapter of its own with its own rules, which we cover separately.
The lever: your form and your residence
Two things decide what actually leaves your account. First, the right W-8 form: without a valid self-certification, payers withhold the maximum rate; with the correct form, treaty rates apply automatically. How to fill it in correctly as an LLC owner is in our W-8 guide. Second, your country of residence: as a nomad without a tax residence you have no treaty protection and pay the full rates on FDAP income. That makes no difference for pure service income, but it costs real money on a dividend portfolio. If you want to combine both, a portfolio and a nomadic life, choose your base country with an eye on its treaties.
And if too much was withheld? The money is not lost: in many situations, excess withholding can be reclaimed through a US tax return (Form 1040-NR). Effort, yes. The end of the world, no.
The formula to remember
Active services from outside the US: no withholding tax. Passive US income: withholding at the rate that applies to your country of residence, controlled through your W-8. Take these two sentences to heart and you understand ninety percent of all withholding tax questions, and you will spot it immediately when someone tries to scare you with the wrong 30 percent.
Your next step
In the complete package we set up your W-8 at the same time, matched to your residence and your types of income. If your case involves a portfolio, royalty income or a change of residence in the middle of the year, book a consultation with Sebastian: one hour, held in English, honest feedback, 15-minute guarantee.
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ZeroTax LLC is a service of Mount Bonnell Advisors in Austin, Texas.
Founder of Mount Bonnell Advisors, Austin, Texas. Has dissolved more withholding tax fears than he has seen actual withholding.
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