U.S. TAX GUIDE IN THE UK
What do I need to do as a US owner of a UK company?
If you own a UK-limited company, it is considered a foreign corporation by the IRS. You must report it by attaching Form 5471 to your US tax return. This form includes multiple schedules that provide detailed information about the company’s financial activities and your role in it.
What is Form 5471?
Form 5471 is an information return for US persons with interests in certain foreign corporations. It details the corporation’s financial information and your involvement.
What are GILTI and the Transition Tax?
The Tax Cuts and Jobs Act introduced GILTI (Global Intangible Low-Taxed Income) and the Transition Tax to tax retained foreign earnings annually. The Transition Tax was a one-time tax on untaxed foreign earnings as of December 31, 2017, payable over eight years. GILTI requires annual income inclusion from foreign corporations starting in 2018.
How does GILTI affect small business owners?
GILTI can complicate tax filings for small business owners. To avoid it, consider structuring ownership to be less than 50% of the company’s shares.
Can UK business owners avoid GILTI?
Yes, if the UK corporate tax rate is at least 90% of the US rate, you can avoid GILTI. This requires filing specific forms and statements with your US tax return.
How do I file for a GILTI exemption?
You must file US tax returns for yourself and your UK company, complete Form 5471, and provide necessary documentation to claim the high-tax exception.
What information is needed for foreign corporation returns?
You need:
- Financial statements (balance sheet and income statement)
- Incorporation documents
- Company details (address, currency, resident agent)
- Stock description
- US shareholders’ details
- Current earnings and profits
- Shareholder income summary
- Party transactions
What if my company’s tax year differs from the US tax year?
Disclose the company’s tax year on Form 5471. However, income recognition and form submission must still align with the shareholder’s tax return.
What are the penalties for not filing Form 5471?
Failure to file incurs a $10,000 penalty per year, increasing to $10,000 per month up to $50,000 if the IRS issues a notice. Additionally, there can be a 10% reduction in foreign tax credits claimed.
Is there relief for filing Form 5471?
An election can treat you as self-employed for US tax purposes, thereby reducing paperwork. This simplifies reporting by including the company’s income on your Schedule C. However, this may not be beneficial for everyone due to self-employment taxes.
Is the self-employment election beneficial for UK small business owners?
For UK residents, this election can be beneficial as they are exempt from US self-employment taxes due to the UK-US Totalization Agreement.
This means you only pay income tax on the company’s profit, offset by the Foreign Tax Credit for taxes paid to HMRC. The election must be filed no earlier than 75 days before the form is filed and applies to all future tax years once made.
