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This article should be read in conjunction with our 'Living and Working in the USA' guide. Tax Residence in the USA (2003) The USA taxes its citizens and, what they call, ‘resident aliens’ on their worldwide income. This would include salary, dividends etc that you earn from your limited company although different rates may apply to the different sources (see below). ‘Non-resident aliens’ are taxed on US source income only and, again, different rates may apply to different sources. In the case of salary and benefits from your limited company, the source is US since the duties of the employment are being performed in the USA, regardless of when or where payments are made. However, dividends from your limited company (assuming this is not deemed to have a permanent establishment in the USA – see below) would be from a non-US source regardless of where the dividends are received. There is therefore scope for tax mitigation here in the event you do not become a US tax resident (although non-US taxes may also need to be considered). An individual is treated as a ‘resident alien’ for US tax purposes if they are within either of the following categories:- 1) They are a ‘green card’ holder, i.e., they are a lawful, permanent resident for immigration purposes; 2) They meet the US ‘substantial presence test’. ‘Substantial presence’ under this test means being present in the USA for at least 31 days in the year concerned as well as being present in the USA for at least 183 days in that and the previous two years, calculated as follows:- 1) All days of the year concerned; 2) 1/3 of the days for the first preceding year; 3) 1/6 of the days for the second preceding year. There are special rules to determine the assessable income where an individual is resident for only part of a year as well as an election that may be made if beneficial. It is essential to obtain specialist US tax advice in this respect. Double Tax Treaties If you are in the USA for less than a relevant 183 day (approximately six months) period and are tax resident (and paying taxes on your salary/benefits) elsewhere then it may be possible and desirable for you to claim tax relief under a particular Double Tax Treaty. The relevant 183 day period is either 183 days in a calendar year or in any period of 12 months, depending upon the particular treaty involved. The recently revised Double Tax Treaty with the UK, for example, looks at 183 days in any 12 month period, which could therefore span a US tax (which is a calendar) year. So, for example, you could work in the USA from 1 October through to the following 15 March and, whilst possibly being tax resident in the USA under the ‘substantial presence test’ through having had prior presence in the USA, could claim to be exempt from US tax under a Double Tax Treaty which considers 183 days in any 12 month period. This is on the basis that, during the period concerned, you were tax resident in the other country and paying taxes on your salary and benefits there. Unfortunately, the same approach will not work with regard to any dividends you receive. In some cases, it would be beneficial, from a tax standpoint, to claim exemption under a Double Tax Treaty, i.e., if your other country of tax residence levies much lower taxes, e.g., as with, perhaps, Singapore. In other cases, whilst the tax liability may be broadly similar, as with, perhaps, the UK and Germany, particularly with higher levels of income but depending upon any US State and City taxes also due, claiming exemption under a Double Tax Treaty offers administrative convenience and savings in professional fees (payroll bureau, tax return filing etc). You will need to seek specialist tax advice from a US accountant or tax lawyer as regards any need to submit a formal claim for relief under the particular Double Tax Treaty concerned. Apart from the 183 day rule, the other criteria for obtaining relief are that you are paid by a non-US company and that the costs of your employment are borne by a non-US company. You should not, generally, have a problem satisfying these criteria. Withholding Obligations Where US income taxes are due in respect of salary received for work performed in the USA, generally speaking, they should be withheld at source and paid over to the Internal Revenue Service (IRS). Although there is a view that a non-US employer is not obliged to make US payroll deductions, such a view would lead to interest and possibly penalties being charged in respect of the outstanding tax calculated via the individual’s personal US Return. You should contact an accountant or tax lawyer in the USA to discuss the practicalities of your limited company making and remitting US payroll deductions. It may be that using a US payroll bureau will be the most straight-forward way of meeting your obligations as an employer. Social Security – International Aspects As an employee of a non-US limited company seconded to the USA, depending upon the country of tax residence of your company and, perhaps, your own nationality, it may be possible for you to remain within your home country social security scheme for a period of up to five years. This will be the case if the USA has a Totalisation Agreement covering social security contributions with the country of your employer or, in some cases, the country of your nationality. You will need to seek specific advice from a US accountant or tax lawyer to establish whether there is a relevant agreement that can apply to you, especially since new agreements are being made on an ongoing basis. Any relevant Totalisation Agreement will cover the contributions of both employer and employee. It will be necessary for you to apply for a ‘Certificate of Coverage’ from the organisation dealing with social security in your home country. In making the application, you will probably require assistance from a tax adviser in the country of tax residence of your company, who happens to specialise in expatriate matters. Obtaining the Certificate will enable you (as employer and employee) to continue to pay into your home social security scheme and thereby protect your entitlement, as an individual, to social security benefits, particularly pensions. At the same time, you would normally apply for a certificate to cover you for publicly-available health care in the USA although you should note that there are strict criteria for eligibility in this regard and the recommendation would be to take out private health care cover whilst you are working in the USA. If your home country contributions are higher than in the USA, e.g., as in France, it could be that you would prefer to pay social security in the USA instead. In this case, you would not make an application for a certificate to keep you in your home country scheme but would withhold US Social Security and Medicare contributions together with the tax withholding. Corporate Tax Considerations Your company will only be subject to US corporation tax if it has a permanent establishment in the USA. Whilst this is generally an office or branch, a permanent establishment can also be deemed to exist if the actual operations take place in the USA. To avoid this deeming provision, you should draw up and sign contracts outside of the USA and also avoid having US letterhead, business cards, name plate etc. Aside from the fact that US corporation tax may be more than in your home country, there are a number of other obligations you would have to meet as a US company and you would wish to avoid these if at all possible. Individual Tax Rates and Allowances Since tax rates and allowances generally change on a calendar year basis, it is best to obtain specific advice from a US accountant or tax lawyer at the appropriate time. This also affects the availability of itemised and standard deductions, which may be more or less generous than what you have been used to. As well as US Federal tax, most states and a number of municipal authorities impose income tax on individuals working or residing within their jurisdictions. For example, if you are resident in New York, you will be liable for Federal, New York State and New York City taxes. At the top end of the scale, the tax rate could reach as high as 49%. However, the top rate of Federal tax starts at a much higher level than, say, in the UK, especially for married taxpayers filing jointly with their spouse. US tax rates are due to be reduced over the next few years although some of the recent changes will not take full effect until 2010. Because of the fairly generous availability of tax deductions, on moderately high income (C£80,000), the average rate tends to be less than the UK and most other European countries. Social security contributions tend to be around double the UK liability for an employee but considerably less for an employer, but this being dependent upon the level of income involved. This is because the liability is, at least in part, capped. As a temporary worker in the US on an assignment of less than one year, it may be possible to claim generous tax deductions for housing, living and travel expenses. It is essential that specialist advice is sought in this regard. Article written by Tower Tax Consulting. The author accepts no responsibility for any loss which may be suffered by anyone taking action based on advice given or solutions offered in the contents of this article. Personal professional advice should always be sought by anyone deciding to undertake a contract overseas. Previous Page
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