If you're a non-U.S. founder working with U.S. clients, you might owe U.S. taxes, even if you don’t have a company there. This is where Effective Connected Income (ECI) comes in. Understanding this concept could save you from costly surprises and penalties down the road.

Let’s break down what ECI is, when it applies, and how to stay compliant.
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💡 What is effective connected income (ECI)?

Effective Connected Income refers to income earned by a foreign entity or individual that is “effectively connected” to a U.S. trade or business. When the IRS deems your income to be ECI, you may be required to:

• File Form 1120-F (U.S. income tax return for a foreign corporation)
  
  
• Pay U.S. corporate income tax on that income
  
  
• Disclose business activities and apply relevant tax treaties
  
  

This can apply even if you don’t have a U.S. entity or office.
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⚠️ When does ECI apply?

The IRS uses a broad definition of what counts as “connected to a U.S. trade or business.” Common triggers include:

• Delivering services to U.S. clients, even remotely
  
  
• Having employees, contractors, or co-founders based in the U.S.
  
  
• Negotiating or closing deals from within the U.S.
  
  
• Signing U.S.-based contracts, or showing a U.S. address on invoices
  
  

If any part of your business activity touches the U.S., it’s worth evaluating whether that income qualifies as ECI.
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🧾 What are the tax consequences?

If your income is classified as ECI:

• You may be taxed at federal corporate tax rates (up to 21%)
  
  
• You must file annually using IRS Form 1120-F
  
  
• In some cases, you may also face withholding taxes from U.S. payers
  
  
• Failing to file, even if no tax is due, can trigger penalties and interest
  
  

If your income is also taxed in your home country, you’ll need to evaluate foreign tax credits or treaty relief to avoid double taxation.
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🌎 Real examples for foreign founders

• An Argentine SaaS startup billing U.S. clients monthly via Stripe
  
  
• A Colombian founder who travels to the U.S. for meetings and signs contracts there
  
  
• A Mexican dev agency with a U.S.-based cofounder managing client accounts
  
  

In each case, the founder may trigger ECI, and often, they don’t find out until it’s too late.

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✅ How to reduce ECI risk

Here’s how to reduce your exposure without stopping your U.S. growth:

• Use clear international contracts with non-U.S. governing law
  
  
• Avoid listing U.S. addresses or contact info in official docs
  
  
• Keep U.S. personnel or co-founders on a separate entity
  
  
• If growth requires it, incorporate a U.S. subsidiary and route revenue through it
  
  

Also, make sure to submit W-8BEN-E forms properly to your U.S. clients, this documents your foreign status and may reduce withholding.
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📞 Worried your startup may de triggering ECI?

We’ve worked with dozens of startups across Latin America and Europe to navigate U.S. tax exposure. From structuring your contracts to filing the right IRS forms, our team can help you avoid unexpected penalties and optimize your global tax footprint.
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👉 Book a free call with our experts to assess your ECI risk and take action before the IRS does.

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