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us expat tax guide – united kingdom

What do I have to do on the US side if I own a UK company?

If you are self-employed and own a UK-limited company, the IRS considers it a foreign corporation. You must attach Form 5471 to your personal US tax return. This form includes several schedules; you must complete them based on your category. All schedules must be attached to your tax return for a small UK company where you own 100% of the shares.

What is Form 5471?

Form 5471, “Information Return of US Persons With Respect to Certain Foreign Corporations,” is required for US citizens or Green Card holders who are shareholders, officers, or directors in a foreign corporation. It is a report to the IRS regarding the corporation’s financial information and your involvement with it.

What is the GILTI and Transition Tax?

The 2017 Tax Cuts and Jobs Act introduced the Transition Tax and Global Intangible Low-Taxed Income (GILTI). These provisions eliminate income deferral for foreign earnings. Previously, only distributions were taxed. It means retained earnings, and profits must be recognized as income, even if you haven’t received the funds.

Transition Tax (Section 965):

  • This one-time tax applies to untaxed earnings of controlled foreign corporations as of December 31, 2017.
  • Taxpayers can pay the Transition Tax in installments over eight years.

GILTI:

  • Starting in 2018, GILTI requires annual inclusion of income from foreign corporations.

How does the GILTI tax affect small business owners?

Small business owners are assessed annually. If GILTI applies, it can complicate tax filings. To avoid GILTI, you can structure ownership to be less than 50% of the company’s shares.

Is there a way to avoid GILTI filing requirements and tax for UK business owners?

Yes, UK business owners can avoid GILTI if the UK corporate tax rate exceeds 90% of the US tax rate. This high-tax exemption means you do not pay GILTI taxes on retained earnings. To benefit, you must file specific forms and statements with your US tax return, both for yourself and the company.

How do I file for a GILTI exemption?

  • Prepare and file US tax returns for yourself and your UK company.
  • Complete Form 5471 and other required forms to document the high-tax exception.

But what information is needed for the preparation of foreign corporation returns?

When filing Form 5471, you need to provide various financial and corporate details, including:

    • Financial Statements: A copy of the balance sheet and an income statement showing profit and loss, converted using IRS exchange rates.
    • Statement of Incorporation: The company’s incorporation documents.
    • Company Details: Address, currency, resident agent, and other basic information extracted from public records.
  • Additional Information:
    • Description of the stock
    • Details of certain US shareholders
    • Current earnings and profits
    • Summary of shareholder’s income
    • Party transactions

What if my company’s tax year does not align with the US tax year?

If your UK company’s tax year does not match the US tax year, you should disclose the company’s tax year on the first page of Form 5471. Income recognition is critical, and Form 5471 and its schedules are due with the income tax return of the affected shareholder or owner.

What are the penalties for failing to file Form 5471?

Failure to file Form 5471 when required incurs a penalty of $10,000 per year. If the IRS notifies you of the filing requirement, the penalty increases to $10,000 per month, up to a maximum of $50,000. Additionally, there may be a 10% reduction in any foreign tax credits claimed from the foreign corporation.

Is there any relief for doing 5471s?

Yes, an election is available to treat you as a self-employed individual for US tax purposes, simplifying the process by eliminating most of the foreign corporation paperwork. This election allows the company’s income to flow through your tax return on Schedule C (self-employment schedule). However, this might not be beneficial for everyone due to self-employment taxes.

Is the self-employment election beneficial for UK small business owners?

For UK small business owners, the self-employment election can be beneficial. UK residents are exempt from US self-employment taxes due to the UK-US Totalization Agreement. You only need to pay income tax on the company’s profit, which can be 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. Once made, the election applies to all future tax years.

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