Hong Kong Company for Amazon FBA: The U.S. Tax Trap That Could Cost 45% of Your Profits

I see this setup all the time. A seller forms a Hong Kong company, puts a Wyoming LLC underneath it, and starts shipping inventory to Amazon FBA warehouses across the U.S. An advisor told them it's "tax-free." It's not. Here's what actually happens.

The Pitch

John is an Australian living in Bali. He sources products from China, sells to U.S. customers through Amazon FBA. Someone tells him to set up a Hong Kong offshore company with a U.S. LLC as a subsidiary. The supposed benefits:

• Minimal Hong Kong tax on offshore income
• No U.S. taxes because Amazon is an "independent agent"
• No Australian tax since he's a nonresident
• Profits flow through untaxed

Sounds great. The problem is it's wrong — and the bill when the IRS catches up is brutal.

What John's Business Actually Looks Like

By year two, John has:

• $10 million in sales, 100% to U.S. customers
• $1 million in profit
• $800,000 in inventory sitting in Amazon warehouses across multiple states
• Sales tax registration in 3 states
• Taxes paid: zero

The IRS looks at this and sees a foreign company fully engaged in U.S. trade or business. Because it is.

Why the IRS Says You Owe Tax (ETOB)

ETOB — Engaged in Trade or Business — is the IRS test for whether a foreign company has enough U.S. activity to owe tax here. Courts define it as "considerable, continuous, and regular" activity. John checks every box.

You're selling inventory constantly. $10 million a year in U.S. sales isn't occasional — it's an ongoing business operation.

Your inventory is physically here. $800K worth of product sitting in Amazon warehouses across the country. That's not a passive investment. That's a business footprint.

Title transfers in the U.S. Under IRC Section 861-7, inventory sales are sourced where title passes. Amazon ships from U.S. warehouses to U.S. customers. Title transfers here. That makes 100% of the income U.S.-source.

You've registered to do business. Sales tax collection in multiple states, a U.S. LLC, a U.S. bank account — you've set up shop.

The Tax Court addressed this decades ago in De Amodio v. Commissioner (1960). Conducting business through agents — even independent ones like Amazon — can establish ETOB. The agents don't need to be "dependent." Regular sales activity is enough.

The Tax Bill Nobody Warned John About

If the IRS determines John's Hong Kong company is engaged in U.S. trade or business, here's the math:

Corporate income tax: $210,000 (21% on $1M profit under IRC Section 11)

Branch profits tax: $237,000 (30% on $790,000 after-tax profits under IRC Section 884)

Total: $447,000

Effective rate: 44.7%

And that's before penalties and interest for unfiled Form 1120-F and Form 5472. The Form 5472 penalty alone is $25,000 per year for not filing.

The "Dependent Agent" Myth

This is the argument I hear most: "Amazon is an independent agent, so no U.S. tax applies." Three problems with that.

First, the dependent agent concept comes from tax treaties. Hong Kong has no comprehensive income tax treaty with the U.S. So the treaty analysis doesn't even apply.

Second, Treasury Regulation 1.864-7 discusses dependent agents, but that regulation only kicks in after ETOB is already established. It doesn't determine whether ETOB exists in the first place.

Third, case law is clear that independent agents can create ETOB. De Amodio specifically dealt with independent agents and still found ETOB.

ETOB depends on the nature and extent of your U.S. activities. Not on whether your agent is dependent or independent.

What John Should Have Done Instead

Used a treaty country. If John had operated through an Australian company, the Australia-U.S. Income Tax Treaty would protect his business profits from U.S. tax unless he had a "permanent establishment" here. Amazon FBA alone may not create PE under treaty.

Other countries with strong treaty protection: UK, Canada, Germany, France.

Understood substance. The IRS cares about where management decisions are actually made, where operations really happen, and whether the structure matches business reality. A Hong Kong shell with zero Hong Kong activity and 100% U.S. operations doesn't hold up.

This Isn't Just a Hong Kong Problem

The same analysis hits every non-treaty jurisdiction:

• Singapore (no income tax treaty with the U.S.)
• Dubai/UAE (no comprehensive treaty)
• Caribbean offshore jurisdictions
• Any financial center without full U.S. treaty protection

If you're running FBA inventory through U.S. warehouses and your entity is in a non-treaty country, you've got exposure.

What You Should Do

Use treaty countries for legitimate tax protection. Understand where your business substance actually is. Get qualified international tax advice before forming entities. And don't rely on the dependent agent myth — it won't save you.

John's "tax-free" million dollars could have cost him $447,000. The cost of proper planning is always less than the cost of getting it wrong.

Already Have a Foreign-Owned U.S. LLC?

Even if you're not sure whether you owe income tax, you almost certainly need to file Form 5472 to report related party transactions — capital contributions, distributions, any payments between you and your LLC. Those go in Part V of Form 5472.

MyFreeTaxAmerica.com walks you through the entire Form 5472 step by step, including the wet-ink signature and filing requirements. Need more time? Here's how to file an extension. If your LLC also holds U.S. rental property, the same filing requirements apply. And our Premium Package includes a full professional review before submission.

IRS Resources:

• Classification of taxpayers for U.S. tax purposes
• Effectively Connected Income (ECI)
• Form 1120-F | Form 5472 | Form 8848

Disclaimer: This is general information, not tax advice. Amazon FBA tax situations are fact-specific. Talk to a qualified tax professional who knows U.S. international tax law and your home country's rules before setting up any structure.