For American expatriates living in the UK who own a UK Limited Company (Ltd), understanding how to manage both UK and US tax obligations can be complex. A UK Ltd offers significant benefits, such as limited liability and potential tax efficiency. However, as a US citizen, you’re also required to report your company’s income, as well as your personal income, to the IRS.
US Tax Obligations for American Expats with a UK Limited Company
As a US citizen, you are required to file taxes with the Internal Revenue Service (IRS) on your worldwide income, which includes income derived from your UK Ltd. There are several aspects of US tax law that will affect your company’s business income, personal income, and how both are reported.
1. Reporting Business Income on Form 1040
The first step for an American expat with a UK Limited Company is understanding how to report income received from the business to the IRS. Although the UK Ltd is a separate legal entity, the income you receive from the company—either as salary, dividends, or other payments—must be reported to the IRS.
- Salary or Wage Income: If you receive a salary from your UK Ltd, that salary is considered taxable income in the US and must be reported on your US tax return. The salary is subject to US income tax and potentially self-employment tax, depending on your role in the company.
- Dividends from the UK Ltd: If you, as a shareholder, receive dividends from your UK Ltd, those dividends must also be reported to the IRS. While the UK taxes dividends, the US will tax them as well, but you may be able to reduce or eliminate double taxation by using tax credits or deductions.
- Other Income: If you receive any other form of income from your UK Ltd, such as bonuses or profit-sharing, that income must be reported as well. The IRS requires you to report all worldwide income, even if it is generated by a foreign entity like your UK Ltd.
2. Double Taxation: The Foreign Tax Credit (FTC)
One of the most significant concerns for US expats is the possibility of double taxation—being taxed by both the UK and the US on the same income. Fortunately, the IRS provides a relief mechanism known as the Foreign Tax Credit (FTC).
The Foreign Tax Credit allows US taxpayers to offset taxes paid to a foreign government against their US tax liability. If you pay taxes in the UK on the income you earn from your UK Limited Company, you may be able to claim the FTC on your US tax return. This helps to prevent being taxed twice on the same income, which can be a significant tax burden for business owners abroad.
For example, if your UK Ltd pays corporation tax on its profits, you may be able to claim that tax credit when filing your US taxes. Similarly, if you pay income tax on dividends or salary received from the UK Ltd, the FTC will reduce your US tax liability.
3. Form 5471: Reporting Foreign Corporation Ownership
If you are a US person who owns 10% or more of a foreign corporation, including a UK Limited Company, you are required to file Form 5471—Information Return of US Persons With Respect to Certain Foreign Corporations. This form provides detailed information about your foreign corporation, including its financial statements, the nature of the company’s business, and the ownership structure.
Form 5471 requires detailed reporting on various aspects of the UK Ltd, including the amount of stock you own, the income and expenses of the company, and any transactions between the US shareholder and the UK Ltd. If you fail to file this form, you could face substantial penalties, so it’s critical to ensure you meet all filing requirements.
4. Self-Employment Tax and National Insurance Contributions
If you are self-employed or operate your UK limited company as a sole proprietorship for US tax purposes, you may need to file Schedule C with your Form 1040. In addition to regular income tax, US citizens working for a UK Ltd may also be subject to self-employment tax. If you are actively involved in the business and are receiving compensation for your work, the IRS may require you to pay self-employment tax, which covers Social Security and Medicare contributions.
However, the UK has its own system of social security taxes known as National Insurance Contributions (NIC). To avoid double taxation on social security contributions, the US and the UK have entered into a Totalization Agreement. This agreement allows you to avoid paying social security taxes in both countries on the same income.
If you are paying NIC in the UK, you may be exempt from paying US self-employment taxes, depending on your specific circumstances. This is an important consideration for US expats, as self-employment taxes can significantly increase the overall tax burden for business owners abroad.
5. Form 8992: US Shareholder Calculation of Global Intangible Low-Taxed Income (GILTI)
Form 8992 is a critical document for US taxpayers who are shareholders of controlled foreign corporations (CFCs), which can include US expats owning a UK Ltd company. Under the Tax Cuts and Jobs Act (TCJA), the US introduced the GILTI tax provision to address the taxation of income generated by foreign subsidiaries with low tax rates. The GILTI provision is aimed at discouraging US businesses from shifting profits to low-tax jurisdictions.
If a US expat owns more than 50% of a foreign company (like a UK Limited Company), that company is considered a controlled foreign corporation (CFC), and the US shareholder may be subject to GILTI taxation. The income subject to GILTI tax is generally the company’s earnings over a routine return on tangible assets. Form 8992 is used to calculate the portion of a CFC’s income that qualifies as GILTI, and then this income is reported on the US tax return.
UK Tax Obligations for a UK Limited Company
While your US tax obligations are complex, you must also ensure that your UK Limited Company complies with UK tax laws. In the UK, a Ltd is required to pay corporation tax on its profits. The UK corporation tax rate is 19% for businesses with profits up to £250,000, and 25% for businesses with profits exceeding £250,000.
Your UK Ltd will need to file a Corporation Tax Return (CT600) with HM Revenue and Customs (HMRC), and pay taxes based on its taxable profits. If the company has employees or pays salaries, you will need to comply with Pay As You Earn (PAYE) and report these payments to HMRC.
The profits of the company, after paying UK corporate tax, are available for distribution to shareholders in the form of dividends. Shareholders are subject to income tax on dividends received, and as an American shareholder, you must report these dividends on your US tax return. The Foreign Tax Credit may help reduce the double taxation of dividends, as mentioned earlier.
Owning a UK Limited Company as an American expat requires careful attention to both UK and US tax obligations. The key areas to focus on include reporting business income to the IRS, understanding how to handle dividends and salary, and utilizing the Foreign Tax Credit to minimize double taxation. Additionally, US expats with a UK Ltd must be aware of the CFC and GILTI tax rules.
Filing taxes for a UK Ltd as an American expat involves meeting both corporate tax requirements in the UK and individual income tax obligations in the US. Given the complexity of international tax laws, it’s essential to work with a tax professional who understands both US and UK tax systems to ensure compliance and to take advantage of available tax reliefs.
