US Tax Residency: Form 6166 and Its Pitfalls

If your US company needs a European tax number, there is no way around Form 6166. But there are a few things you need to know about it.

Entrepreneurs come across Form 6166 when they want to apply for a European VAT number for their US company. With exempt LLCs in particular, though, you need to be careful.

Exempt LLCs, also called tax-free LLCs, are a popular way for people living in non-dom countries or similar jurisdictions, and for digital nomads, to optimize their overall tax burden. As the sole owner of such a company with no presence in the States that would trigger US tax liability, you can take in profits tax-free.

As an Amazon seller, for example, you quickly run into a problem with an exempt LLC: the online giant requires a tax number from each country you sell in. So if you want to sell your products on Amazon Germany through your US company, you need a German VAT number. Why is this case so interesting?

To be issued a tax number like this by the German (or any other European) tax authorities, you need a certificate of residency, meaning a document that proves where the company is resident for tax purposes. In the US, that document is Form 6166. This Confirmation of US Tax Residency has to be requested from the IRS. And this is where it gets tricky:

The profits of an exempt LLC are not taxable in the US, so by definition the company is not a tax resident of the United States. That means the IRS will not issue it the certificate of residency it needs.

For plans like this, the exempt LLC is clearly not the right fit. But if you are a digital nomad or live in Ireland, the UK, Malta or a country with similar foreign tax rules, there is an alternative.

Instead of an LLC, this solution is built on a US Inc: you form a C Corporation with a US managing director (we can provide one if you wish). This company is assessed for tax in the US and is therefore a tax resident. As such, applying for the certificate of residency with Form 6166 is straightforward.

From a tax point of view, this setup does not give you a tax-free US company, but you can pay the profits out to yourself as salary. That salary is taxable neither in the States nor in your country of residence (provided it does not tax foreign income). Learn more about taking profits out of a C Corporation here.

Even here, though, Form 6166 has its pitfalls. From our experience with other clients, we advise you to allow plenty of lead time. The process from filing to confirmation of tax residency and finally the issue of the European tax number can take several months. Ideally, we recommend applying for the Confirmation of US Tax Residency 6 months before your planned sales launch in Europe.

Everything else about the form is on our Form 6166 page, and our exempt LLC page explains how the tax-free option works. You will find more articles under News. And if you want to run a US LLC with no US permanent establishment at all, our sister site zerotax.llc is the place to go.