US Citizen contracting in UK

[jamesbrown]

Is renouncing US citizenship an option?

Drastic, but many have for precisely this reason...

[WordIsBond]

Am I right? Is there a more straightforward way of making sure I don't end up paying US tax? One alternative would be for the company to make a contribution to my pension, which is very efficient for UK tax.

Thanks!

Please get some good advice. Above I linked to another thread in which there is more information. Please read it before paying for good advice.

I found David Treitel to be well-informed, you could talk to him. There are others. If you want a one-stop shop I don't think he'll do your UK accounting, there are a few who would do both. Not sure how good they are, though. We use a UK accountant for our UK stuff and someone in America for my wife's US stuff. But you need someone who really knows.

The money you pay to get an expert's advice could save you thousands for years. It's worth it.

Pension contributions save tax on both sides of the pond. You are right there.

You probably want to elect to be a disregarded entity, which eliminates a lot of the CFC hassles. But you need to understand all the issues as to how they relate to your own situation, and that's not going to happen on an open forum, certainly not this one.

If you file as a disregarded entity, you won't have a company as far as US tax is concerned.
You'll be taxed in the US on all your company's income as self-employment income, and report it on Schedule C or Schedule E (depending on whether you are the only shareholder or whether you give shares to a spouse). You will then claim the Foreign Tax Credit, claiming all UK corporation tax paid as well as any UK dividend tax paid, as foreign taxes paid. That should wipe out all US income tax liability on your UK contracting income, in almost every case, with probably several thousands of tax credits to carry forward every year which you'll probably never be able to use.

Whether funds are retained in the company or disbursed as dividends becomes irrelevant in this case, as far as US tax is concerned.

I believe US "Tax Reform" makes the disregarded entity the best option in most cases, even more than it was before. But there may be cases in which it isn't, and I am not an expert, and you really need advice from someone who can convince you he actually knows what he's talking about. Then, once he gives you his advice, you go check it out for yourself to make sure, because you can't trust everyone who's an "expert" and even the experts get things wrong sometimes and IT'S YOUR COMPANY AND RESPONSIBILITY.

And you should probably be very hesitant before renouncing American citizenship, you'll want to be very sure that living in the UK is a long-term thing. It gives us options in retirement that I wouldn't have otherwise, for one thing. Also, they are making that harder and potentially more expensive, from what I've heard, but I've never really checked.

[Andrew@Wisteria]

Resurrecting this thread as there seem to be some well informed comments!

I am a dual UK-US citizen. I have just started contracting in the UK through a UK registered limited company. With an eye on UK tax, I was planning to take only a minimal salary and dividend for the time being.

However, I'm now worried that the retained profits in the company would be counted as Subpart F income, so would be included in my US tax return. One thing that would seem to prevent this is that the UK would not be considered a low tax country, as the current uk corporation tax rate of 19% is above 90% of the new US rate of 21%. My understanding it therefore that I would not end up paying US tax on retained earning of my UK company.

Am I right? Is there a more straightforward way of making sure I don't end up paying US tax? One alternative would be for the company to make a contribution to my pension, which is very efficient for UK tax.

Thanks!

Happy to intro you to our sister company who deal with US tax, feel free to get in touch.

[MacContractor]

Resurrecting this thread as there seem to be some well informed comments!

I am a dual UK-US citizen. I have just started contracting in the UK through a UK registered limited company. With an eye on UK tax, I was planning to take only a minimal salary and dividend for the time being.

However, I'm now worried that the retained profits in the company would be counted as Subpart F income, so would be included in my US tax return. One thing that would seem to prevent this is that the UK would not be considered a low tax country, as the current uk corporation tax rate of 19% is above 90% of the new US rate of 21%. My understanding it therefore that I would not end up paying US tax on retained earning of my UK company.

Am I right? Is there a more straightforward way of making sure I don't end up paying US tax? One alternative would be for the company to make a contribution to my pension, which is very efficient for UK tax.

Thanks!

I was in the same situation as yourself, being a dual UK-US citizen and it was a massive amount of hassle each year come US tax return time. Eventually I got fed up with all the time and money I was having to spend just to keep myself within the law for a country I only ever visited when on holiday. I renounced my US citizenship and in my opinion, unless you have an intention of living or working in the US for any length of time, having a US passport is just a massive mill stone around your neck.

[WordIsBond]

I renounced my US citizenship and in my opinion, unless you have an intention of living or working in the US for any length of time, having a US passport is just a massive mill stone around your neck.

Other reasons:
1. If you worked there long enough to have entitlement to a Social Security payment in retirement, or to have SSA survivor's benefits, make sure you aren't messing up your entitlement. Even if it isn't a lot because most of your working life is here, a lifetime pension of even a few hundred quid a month is probably of enough value to justify dealing with the annual tax reporting requirement.
2. If you have US clients and life would be easier with a US bank account, that's worth something.
3. If you have children that are US citizens you can get the additional child tax credit which can make a nice tax refund even if you have no US tax liability.
4. Enough people have been doing this that they are starting to bring in provisions to hit people with a nice exit tax. Make sure you are aware of any such thing before doing it.

There's probably others I haven't thought about, anybody who is thinking about this should go exploring around US expat sites to figure it out.

We'll probably retire there, so we've kept my wife's citizenship in place. Lots of warm places to retire in America, not so many in the UK.

[MacContractor]

Other reasons:
1. If you worked there long enough to have entitlement to a Social Security payment in retirement, or to have SSA survivor's benefits, make sure you aren't messing up your entitlement. Even if it isn't a lot because most of your working life is here, a lifetime pension of even a few hundred quid a month is probably of enough value to justify dealing with the annual tax reporting requirement.
2. If you have US clients and life would be easier with a US bank account, that's worth something.
3. If you have children that are US citizens you can get the additional child tax credit which can make a nice tax refund even if you have no US tax liability.
4. Enough people have been doing this that they are starting to bring in provisions to hit people with a nice exit tax. Make sure you are aware of any such thing before doing it.

There's probably others I haven't thought about, anybody who is thinking about this should go exploring around US expat sites to figure it out.

We'll probably retire there, so we've kept my wife's citizenship in place. Lots of warm places to retire in America, not so many in the UK.

All good advice.

It's very complicated to extricate yourself from the US. I was what would be classed as an 'accidental American', it just so happened I was born there, so I'm happy that I don't have to worry about FATCA, FBAR and everything else that came with it, but as you've said if you do go down the renunciation route definitely do your homework.

[Lance]

Other reasons:
1. If you worked there long enough to have entitlement to a Social Security payment in retirement, or to have SSA survivor's benefits, make sure you aren't messing up your entitlement. Even if it isn't a lot because most of your working life is here, a lifetime pension of even a few hundred quid a month is probably of enough value to justify dealing with the annual tax reporting requirement.
2. If you have US clients and life would be easier with a US bank account, that's worth something.
3. If you have children that are US citizens you can get the additional child tax credit which can make a nice tax refund even if you have no US tax liability.
4. Enough people have been doing this that they are starting to bring in provisions to hit people with a nice exit tax. Make sure you are aware of any such thing before doing it.

There's probably others I haven't thought about, anybody who is thinking about this should go exploring around US expat sites to figure it out.

We'll probably retire there, so we've kept my wife's citizenship in place. Lots of warm places to retire in America, not so many in the UK.

5. you can buy much cheaper flights if you have a US credit/debit card (hundreds of dollars less)
6. Europe might not always be the better place to be so having USA as a valid easy option seems sensible.


Seriously though. Why would anyone reject being part of the second largest economic trading block to save a few quid?
That's almost as barmy as rejecting being part of the largest economic trading block to save a few quid and only really wanted by a small bunch of twats in the first place.

[Guest]

I'd be hesitant about forming a limited company right now as a US citizen, unless you're willing to fork out a lot for professional advice - which will also vary a lot depending on who you ask. I'm a US citizen and have been a contractor for about 4 years now. And dealing with the trump tax has produced at least a few grey hairs. There is still a lot of confusion around the section 951 tax (repatriation tax), and the GILTI tax (yes, it's really called that) which is the ongoing tax on assets in a company. I'd wait at least for the fallout to finish and people to understand the situation better - possibly in the next year or so. I'm also not sure if electing as a disregarded entity gets out of the GILTI tax. But if it does, I highly recommend that route, it will save you a lot of pain. But it also means you can't do income sharing with a spouse.

Otherwise, a few basic words of advice if you want to go the contractor route still. First, if you don't have a US accountant, you will want one who understands the various foreign filing requirements. It is easy to make a mistake. You want to avoid investing in UK pensions / retirement funds unless you want to risk having to file a pFIC, or know what you're doing. Most expats continue to invest in US IRAs for instance. For that you need to use foreign tax credits, as FEIE will wipe out your earned income. If you choose to do 50/50 with a spouse, filing 5471 is unavoidable and you'll also have to handle GILTI taxes. I also agree with the suggestion for your company year end to be December.

Finally keep in mind if you're doing the family visa route, documenting the financial requirement is extremely burdensome compared to being a perm employee.

To be honest, had I known the headache of US taxes and visa issues, I would have been much less willing to go contracting. In fact I'm starting perm employment very soon, and will probably wind down my company (I need a break from 4 years of tax/visa hell). I'm seriously considering renouncement before I go back to contracting again.

[WordIsBond]

Hold on, there's some pretty important inaccurate information here.

I'd be hesitant about forming a limited company right now as a US citizen, unless you're willing to fork out a lot for professional advice - which will also vary a lot depending on who you ask.

Partially true. But if you are going to save several thousands on UK tax every year, the advice is worth it.

And dealing with the trump tax has produced at least a few grey hairs. There is still a lot of confusion around the section 951 tax (repatriation tax), and the GILTI tax (yes, it's really called that) which is the ongoing tax on assets in a company. I'd wait at least for the fallout to finish and people to understand the situation better - possibly in the next year or so. I'm also not sure if electing as a disregarded entity gets out of the GILTI tax.

If you elected as a disregarded entity (which most should, to be honest), the GILTI tax does not apply. Electing as a disregarded entity means that the company is not recognised as existing under US tax. All income is therefore treated as taxable in the year in which the company earned it, so there are no retained earnings.

I doubt you can dodge it by electing as a disregarded entity now, if you hadn't already. But if you already had done the election, there's no problem.

I'm also not sure if electing as a disregarded entity gets out of the GILTI tax. But if it does, I highly recommend that route, it will save you a lot of pain. But it also means you can't do income sharing with a spouse.

This is seriously mistaken. If you joint own a company with your spouse (or anyone else) and you file as a disregarded entity, it is treated for US tax purposes as a partnership. One owner, it goes on Schedule C as self-employed. Two or more owners, the partnership reports on Form 8865, and each individual taxpayer reports the partnership income on Schedule E.

This is a very good question to ask a US tax advisor -- can I and should I file as a disregarded entity, is it different if my wife owns shares, etc. If they can't answer intelligently, find one who can. Also find out what they charge to prepare 8865 vs what they charge to prepare 5471.

First, if you don't have a US accountant, you will want one who understands the various foreign filing requirements. It is easy to make a mistake.

Yes. Ask questions like the one above.

You want to avoid investing in UK pensions / retirement funds unless you want to risk having to file a pFIC, or know what you're doing.

No. You do not have to file a PFIC with a UK pension, it is protected. You DO have to file a PFIC and pay punitive taxes if you invest in any UK fund / investment trust outside of a pension wrapper -- for instance, an ISA. Just don't do it. No American should invest in non-US funds of any kind except within a pension wrapper. (And no American living in the UK should invest in US funds, either. You can't win, you have to either invest within a pension wrapper or invest in individual shares.)

If you choose to do 50/50 with a spouse, filing 5471 is unavoidable and you'll also have to handle GILTI taxes.

Answered above, you've been given bad advice on this. Not that 8865 is a walk in the park, but it is better than 5471, and it is better all ways round.

Note: typically you have to file as a disregarded entity within a very short time after opening your company. So US citizens contracting in the UK may need to close their company and open a new one to be able to file as a disregarded entity.

I also agree with the suggestion for your company year end to be December.

Yes, definitely.

Finally keep in mind if you're doing the family visa route, documenting the financial requirement is extremely burdensome compared to being a perm employee.

Not sure what you mean here, but I was a permie when my American wife and I married, so you are outside of my experience there.

To be honest, had I known the headache of US taxes and visa issues, I would have been much less willing to go contracting. In fact I'm starting perm employment very soon, and will probably wind down my company (I need a break from 4 years of tax/visa hell). I'm seriously considering renouncement before I go back to contracting again.

You should get some better advice before doing anything drastic. There are many issues but some of what you've said here is not correct. It sounds like you've not really had all the options explained to you, and may have had a more difficult time than necessary as a result.

I also suggest you let American Citizens Abroad know you are considering renouncing and why. They have been after Congress to do something about the taxation treatment of ex-pats and they need to keep hearing and passing it on. The US tax code is not supposed to make life hell for expats who start a business abroad, it isn't supposed to punish you for investing in a fund, it isn't supposed to hit you with capital gains taxes when you pay off your UK mortgage, etc. It's gone insane.

[Guest]

Thanks WordIsBond for the detailed response. The law is complex, and it's easy to make mistakes.

No. You do not have to file a PFIC with a UK pension, it is protected. You DO have to file a PFIC and pay punitive taxes if you invest in any UK fund / investment trust outside of a pension wrapper -- for instance, an ISA. Just don't do it. No American should invest in non-US funds of any kind except within a pension wrapper. (And no American living in the UK should invest in US funds, either. You can't win, you have to either invest within a pension wrapper or invest in individual shares.)

Yes that's what I meant by "know what you're doing". If you don't, you will trigger pFIC.

You should get some better advice before doing anything drastic. There are many issues but some of what you've said here is not correct. It sounds like you've not really had all the options explained to you, and may have had a more difficult time than necessary as a result.

I wonder if you have any suggestions? I spoke to two different US CPAs, and based on their advice set up my company as a foreign C-Corp, requiring 5471 and so on. Both said it didn't make sense to mark as disregarded, which may have been bad advice like you said. I've found it difficult to find someone who is knowledgeable that isn't going to charge a fortune.