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

MyFreetaxAmerica

18 Nov 2025 • 4 min read

Are you considering a Hong Kong offshore company for your Amazon FBA business? This tax strategy could backfire spectacularly.

The Hong Kong Amazon FBA Promise (Too Good to Be True)

John, an Australian entrepreneur living in Bali, discovers Amazon FBA. He sources products from China and sells to U.S. customers through Amazon's fulfillment network. An advisor suggests forming a Hong Kong offshore company with a U.S. LLC underneath.

The pitch sounds perfect:

Minimal Hong Kong corporate tax on offshore income
No U.S. taxes without "dependent agents"
No Australian tax liability being a nonresident
"Tax-free" profits

The Reality: This structure could trigger a devastating 45% U.S. tax bill plus penalties.

John's Amazon FBA Business Structure

Years 1: John sets up:

Hong Kong company (parent)
Wyoming LLC (subsidiary, disregarded entity)
U.S. bank account with EIN
Amazon FBA seller account

Year 2 Results:

Sales: $10 million (100% to U.S. customers)
Profits: $1 million
Inventory: $800,000 average in Amazon U.S. warehouses
Sales tax registration: 3 states
Taxes paid: $0

The Problem: The IRS likely views this as U.S. trade or business.

How Inventory Sales Create U.S. Tax Obligations (ETOB Explained)

What is ETOB?

ETOB (Engaged in Trade or Business) is the IRS test for whether foreign companies owe U.S. taxes. Courts define ETOB as "considerable, continuous, and regular" business activities in the U.S.

Why Selling Inventory Constitutes ETOB

For Amazon FBA sellers, inventory sales establish ETOB through:

1. Regular Sales Activity

Consistently selling to U.S. customers = ongoing business operations
$10 million annual sales = substantial continuous activity

2. Physical Inventory Presence

$800,000 inventory in U.S. warehouses = business presence
Amazon FBA storage across multiple states = significant U.S. footprint

3. Title Transfer Location

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

4. Business Registration

Sales tax collection in multiple states = formal business operations
U.S. LLC and bank account = established U.S. presence

The Legal Standard

In De Amodio v. Commissioner (1960), the Tax Court ruled that conducting business "through agents" (including independent agents like Amazon) establishes ETOB. The agents don't need to be "dependent" - regular sales activity alone is enough.

Key Point: Courts apply both quantitative and qualitative analysis. John's business scores high on both:

Quantitative: $10M sales, $800K inventory
Qualitative: 100% U.S. customers, 100% U.S. inventory, zero Hong Kong activity

The Devastating Tax Calculation

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

Corporate Income Tax: $210,000
(21% × $1,000,000 under IRC Section 11)

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

Total U.S. Tax: $447,000

Effective Tax Rate: 44.7%

Plus: Penalties, interest, and compliance costs for unfiled Form 1120-F and Form 5472.

The "Dependent Agent" Myth Debunked

Many advisors claim no U.S. tax applies without "dependent agents." This is wrong.

Why the confusion exists:

Tax treaties mention dependent agents - but Hong Kong has no comprehensive income tax treaty with the U.S.
Treasury Regulation 1.864-7 discusses dependent agents - but only applies after ETOB is already established
Case law shows independent agents (like Amazon) can create ETOB - De Amodio specifically addressed independent agents

The Truth: ETOB depends on the nature and extent of U.S. activities, not agent dependency.

Better Amazon FBA Tax Strategies

Use Treaty Countries

If John had used an Australian company instead:

The Australia-U.S. Income Tax Treaty protects business profits
No U.S. tax unless there's a "permanent establishment"
Amazon FBA alone may not create permanent establishment under treaty

Other treaty countries with strong protection:

United Kingdom
Canada
Germany
France

Understand Substance Requirements

Real business substance matters:

Where are management decisions made?
Where do you actually operate?
Does your structure match business reality?

Other Jurisdictions at Risk

This analysis applies to all non-treaty or limited-treaty jurisdictions:

Singapore (No treaty benefits)
Dubai/UAE (no comprehensive treaty)
Caribbean offshore jurisdictions
Other financial centers without full U.S. treaty protection

Essential IRS Resources for Amazon FBA Sellers

Tax Classification & Requirements:

Required Forms:

Key Takeaways for Amazon FBA Entrepreneurs

✅ DO: Use treaty countries for legitimate tax protection
✅ DO: Understand where your business substance really is
✅ DO: Get qualified international tax advice before forming entities
✅ DO: Consider permanent establishment rules under treaties

❌ DON'T: Rely on "dependent agent" myths
❌ DON'T: Assume offshore = tax-free
❌ DON'T: Ignore ETOB risks with U.S. inventory
❌ DON'T: Form structures without understanding substance

Bottom Line: The $447,000 Lesson

John's "tax-free" $1 million profit could trigger $447,000 in U.S. taxes plus penalties. Regular inventory sales through Amazon FBA constitute engaging in U.S. trade or business - regardless of where your company is incorporated.

Legitimate tax planning requires understanding substance over form. The cost of proper planning is always less than the cost of getting it wrong.

Disclaimer: This article provides general information only and is not tax advice. Amazon FBA tax situations are highly fact-specific. Consult qualified tax professionals familiar with both U.S. international tax law and your home country's tax laws before implementing any structure.

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