The Complex Tax considerations for UK entrepreneurs working in the United States
Post Brexit global trading is likely to be a large part of many entrepreneur’s growth plans for their business and the US is understandably often a market being considered for expansion into.
There are however a number of tax considerations to be aware of for a UK company thinking of doing business in the US and it is important to properly consider these in advance to ensure you avoid unnecessary excessive dual tax bills.
Under UK rules, a UK registered limited company will be subject to UK corporation tax on all of the company’s worldwide taxable profits. However, under US rules, corporations engaged in business in the US will also need to pay US corporation tax on income on activities which are considered to represent a trade or permanent establishment in the US.
To avoid double taxation the UK company may qualify for benefits under the double taxation agreement between the two countries, and in some cases this treaty can render the company wholly or partially exempt from certain US federal income taxes. The US rate of corporation tax is however currently higher than the UK at 21% compared to 19% and has historically been even higher than this. And, the double taxation agreement does not cover any state taxes that may be due.
Property taxes, sales and use taxes will be applied with differing rates for each US state, county or city in which business is conducted. The US does not have a value added tax system. It will therefore be important to be clear what the position of the business is in terms of taxes it will owe and what it will be expected to charge customers.
Often, doing business in the US also results in the entrepreneur spending more time in the US which itself can result in tax consequences for the company itself.
Where the owner of a UK company has the potential to be considered US resident due to the amount of time spent building the business in that market, the position needs to be carefully considered; as in some cases, an alternative business structure may be more tax efficient.
Potential GILTI tax liabilities should also be taken into consideration. This refers to a minimum tax provision that is applied to the US shareholders of controlled foreign corporations (CFCs), and relates to the income gained from intangible assets such as copyrights, patents and trademarks. Set at a minimum of 10.5 percent to deter profits being moved abroad, it roughly mirrors the estimated tax due from mobile assets and must be included in a business’s gross annual income. However, in many cases US corporations are able to reduce the GILTI by 50 percent and claim an 80 percent foreign tax credit for taxes accumulated or paid on GILTI.
An option to consider here is the check the box election. This allows the net income from the business to be taxed on a personal tax return, at an individual’s ordinary rate, in the same way as being self-employed.
In order to make an informed decision on this tax avenue, attention should be paid to the expected future revenue of the company, potential cash extraction requirements, personal tax positions relating to foreign tax credits, the exit strategy and the additional costs associated with reporting on a UK limited company in the US.
An important factor that is not always considered when setting up a UK company in the U.S. is the exit strategy. And, the ‘check the box’ option can enable the retention of the Entrepreneurs’ Relief for capital gains purposes in the UK. By removing the US capital gains liability, it secures the beneficial 10% tax rate when the business is eventually sold. This reduced Capital Gains Tax rate of 10% is not usually an option; as upon disposal of a business, the US long-term Capital Gains Tax rate of 20%, in addition to an additional 3.8% Net Investment Income Tax (NIIT) would normally be due.
For individuals that own an excess of 50% of shares in a limited company, Subpart F rules may apply. This comes into effect if the Controlled Foreign Corporation (CFC) receives dividends, interest, rent or royalties; or income from unassigned personal service contracts. In these cases, an individual tax payer is taxed on their proportional share of the Subpart F income earned by the CFC, regardless of whether it has been distributed to them.
But, if a minimum 75% of the company income, or 50% of its assets, yield a passive income or no income, the company falls under the PFIC regulations. In these circumstances, a minimal tax applies for US stock owners when dividends, or the disposal of dividends for PFIC stock show a capital gain. Additional costs can also be incurred for the completion and filing of annual ‘information return by a shareholder of a PFIC’ forms. However, company classification changes to that of an entity, negate the need to cover any of the complex Passive Foreign Investment Company (PFIC) requirements. And when an individual owns less than 50% of a company’s shares or voting rights, Subpart F rules do not apply, but the company could be treated as a PFIC if a 'check-the-box' election was not made.
Each company has its own unique requirements and the pointers here are an indication of the variables involved. Therefore, it would always be prudent to gain assistance from a professional tax advisor before any final plans are put in place.
Other complexities occur when the UK company is conducted through a US subsidiary, a US Office or US-Based Employee or Agent.
For a comprehensive understanding of the tax options available for all company formats, please contact our dedicated team on 01932 320800 or email email@example.com.