US Citizen - UK Ltd Company - Disregarded entity?

[US Cookie]

Hi all,

This is my first post - I've learned a lot from reading this forum over the past couple of days.

I am dual US/UK citizen and after a career break, I took a freelance/contract role that came up unexpectedly. That led to another one and so on. I've just been filing as self-employed - it was a little tricky the first time but I figured it out and filed both my US and UK taxes myself online. Now I've been doing this for a couple of years and I'm about to start a new contract so I thought it would be useful to set up a limited company for the tax benefits (particularly for pension contributions to my SIPP). I am not married and I would be the only shareholder in my UK limited company.

Being quite nervous about the tax implications, I started researching and what I have learned from this helpful forum and other websites would seem to indicate that:

1. I can set up a UK limited company and as the sole owner I can register the company as a foreign disregarded entity using IRS Form 8832. I will also need to file for an Employer Identification Number. Annually I will have to file Form 8858.
2. If my limited company is a disregarded entity, it is not a Controlled Foreign Corporation and I will not have to file Form 5471 (which is horrible, time-consuming and expensive).
3. I can pay myself from my company using a combination of salary and dividends for UK tax purposes but for US tax purposes this would all be earned income?
4. I can use the UK corporation tax and dividend tax towards the Foreign Tax Credit to wipe out any US tax liability and carry forward unused tax credits for 10 years.
5. I should use the Foreign Tax Credit rather than the Foreign Earned Income Exclusion bc the FEIE is only approx $105k and my earnings will exceed that.
6. I should change my UK limited company's tax year to the calendar year for ease of filing US tax returns.
7. I don't intend to retain any earnings in my limited company so I would not be subject to the GILTI tax?

Does this make sense? Can anyone tell me where (if) I'm going wrong here? Of course I've reached out to several tax advisors (including several recommended on this forum), but have so far only managed to speak to one. They told me that even if I file form 8832 to have my UK limited company treated as a disregarded entity, it would still be a CFC and I would therefore still have to file 5471, which they confirmed is a terrible hassle and very expensive. Perhaps I explained something incorrectly to this tax advisor, or I've misunderstood something somewhere. Or perhaps that particular advisor is incorrect?

I am still waiting for my calls/messages to be returned, so that I can get confirmation from another advisor about whether this is true or not. If anyone here could point out the error to me in the meantime, it would be much appreciated.

And any further guidance would be most welcome as well.

Thank you in advance.

[eek]

First question - is that new contract inside or outside IR35? As those rules are changing in April and most new contracts are inside. And if you are inside there is zero point using a limited company, join an umbrella as an employee and work through them.

Beyond that I don't think there is anyone on this site who is a US Citizen and so subjected to IRS's global tax rules. You will need specialist advice there as I don't think there is anyone who can help you.

[concord]

Hello and welcome.

I think your sketch of what you need to do is correct but I find this very complex and it's not something I would want to handle myself. I use a US/UK tax specialist and would recommend you do the same if you don't want to spend a lot of time on this and still probably get something wrong. I'd also mention that you will likely get different advice from different advisors (as with any professional service).

On your points, when I say "correct" I mean this is what it appears my accountant is doing:

1. Correct
2. Correct - I'm actually about to gift shares to my wife and will need to start filing form 5471 so will be reversing this process
3. Correct
4. I think so but confirm with an advisor
5. My 2018 return, for example, includes From 1116 and 2555 so I'm not sure about this. I may earn less than you though so it may be a different situation.
6. Correct
7. If your company is a disregarded entity for US purposes, I don't think this applies but confirm with an advisor. I actually need to ask my accountant about this...

I presume you file an FBAR each year and know about FATCA and form 8938 as well? Also, if you have a pension are you filing for that? I don't have one but I get an email from my accountant each year just reminding clients about that.

After all this filing, I owe $0. I'm not a political person but expat tax obligations will get me writing to my elected representatives.

[hairymouse]

I'm a US citizen and have been running my own limited company for years. However, I can't give advice because I don't even pretend to know about tax law and leave it up to my accountants. That said, I am pretty certain that my UK limited company is disregarded entity.

I'm surprised that you are having trouble finding someone who can give you advice. My guys responded immediately to all queries, but they weren't cheap.

Contact Scott Ryan
Port Huron, MI Accounting Firm | Home Page | Austin, Niester, Schweihofer and Finnegan, P.C.
[email protected]

There's a forum of Americans living in the UK:
UK-Yankee Forum - Index
There's a few people there who like to talk about taxes but I doubt you'll find anyone who can answer the specific technical questions you've got.

Good Luck

[US Cookie]

First question - is that new contract inside or outside IR35? As those rules are changing in April and most new contracts are inside. And if you are inside there is zero point using a limited company, join an umbrella as an employee and work through them.

Beyond that I don't think there is anyone on this site who is a US Citizen and so subjected to IRS's global tax rules. You will need specialist advice there as I don't think there is anyone who can help you.

Thank you for your reply. Yes I believe the new contract will be outside IR 35 - it’s a specific project for a set length of time and I’m not working for them exclusively. I will have other clients at the same time.

[northernladuk]

Thank you for your reply. Yes I believe the new contract will be outside IR 35 - it’s a specific project for a set length of time and I’m not working for them exclusively. I will have other clients at the same time.

Neither of those reasons can make an IR35 determination.

[WordIsBond]

1. I can set up a UK limited company and as the sole owner I can register the company as a foreign disregarded entity using IRS Form 8832. I will also need to file for an Employer Identification Number.

Certainly correct.

1. Annually I will have to file Form 8858.

Probably correct but I've seen advice to the contrary. I would do it.

2. If my limited company is a disregarded entity, it is not a Controlled Foreign Corporation and I will not have to file Form 5471 (which is horrible, time-consuming and expensive).

Certainly correct.

3. I can pay myself from my company using a combination of salary and dividends for UK tax purposes but for US tax purposes this would all be earned income?

Mostly correct. For US tax purposes all of the company's profits (whether disbursed or retained) would be self-employment income. As far as the US/IRS is concerned, the company is a disregarded entity, it doesn't exist, and you are self-employed. So, salary, dividend, and any retained profit is US taxable self employment income. (I am certain on this point)

4. I can use the UK corporation tax and dividend tax towards the Foreign Tax Credit to wipe out any US tax liability and carry forward unused tax credits for 10 years.

Certainly correct. You use the current year UK CT and income tax (including dividend tax) against this year's US tax liability. If there is remaining liability, you apply credit you carried forward from the previous ten years, starting with the oldest credit first.

5. I should use the Foreign Tax Credit rather than the Foreign Earned Income Exclusion bc the FEIE is only approx $105k and my earnings will exceed that.

Certainly correct. There is conflicting advice as to whether you could even use FEIE, but FTC is superior anyway at your income level. You will probably not need carryforward of old credits, your CT and div tax will probably wipe out any US tax liability, FWIW.

6. I should change my UK limited company's tax year to the calendar year for ease of filing US tax returns.

Probably. It certainly makes some things easier. It's not required, though, and if there is compelling reason to use another year it just means you'll have a more complex US reporting situation. I'm not sure what compelling reason there could be, though.

7. I don't intend to retain any earnings in my limited company so I would not be subject to the GILTI tax?

Irrelevant. Your limited company won't exist as far as US tax is concerned, so it won't retain any earnings as far as the US tax is concerned. It's a disregarded entity. So this simply doesn't matter, there will be no GILTI tax. You will be taxed on retained earnings every year as self-employed income. So if it makes more sense from a UK perspective to retain earnings, rather than pay higher rate dividend tax, feel free to do so without worrying about GILTI.

I am very sure on this point but getting this wrong is expensive enough that you pay someone to tell you so. But if an advisor says anything contrary to what I've just said he's probably an idiot and find another.

Can anyone tell me where (if) I'm going wrong here?

You are almost entirely on track.

but have so far only managed to speak to one. They told me that even if I file form 8832 to have my UK limited company treated as a disregarded entity, it would still be a CFC and I would therefore still have to file 5471, which they confirmed is a terrible hassle and very expensive. Perhaps I explained something incorrectly to this tax advisor, or I've misunderstood something somewhere. Or perhaps that particular advisor is incorrect?

That advisor is either an idiot or a very shrewd individual who wants to make a lot of money off of you filing an unnecessary 5471 every year. Either that, or perhaps there's a communication breakdown. Ask the advisor why a disregarded entity is not disregarded for the purposes of CFC / 5471, and actually what is the point of disregarded entity status. He'd better have a good answer, a very good answer, or you need a new advisor.

There are a few others here who do this all the time as well, perhaps they will chime in. Looks to me like you are better prepared than most.

[WordIsBond]

2. Correct - I'm actually about to gift shares to my wife and will need to start filing form 5471 so will be reversing this process

Unnecessary. You can still have a disregarded entity. It just means you have to file the foreign partnership form, 8865 if I remember. Which is complicated but not as bad as 5471.

[concord]

Unnecessary. You can still have a disregarded entity. It just means you have to file the foreign partnership form, 8865 if I remember. Which is complicated but not as bad as 5471.

Thanks, you're right. I reread the email the from my accountant and they confirmed that the classification would change to partnership and they would need to file form 8865. They are charging quite a bit for it because it needs to include more details (P&L account, balance sheet, etc). I'm paying a lot for someone to calculate I don't owe anything.

They also mentioned that any US sourced income would bring about more paperwork.

[US Cookie]

Thank you all for your replies which are so helpful and much appreciated, especially WordIsBond. I have learned a lot from your posts on other threads as well!

I have finally spoken to someone who is mentioned on this and other sites as a highly regarded tax advisor for US/UK issues and he has confirmed that I can indeed file as a disregarded entity and therefore would not have a CFC.

I had an extended conversation with this particular expert this morning and feel confident now that I’ve received proper advice about the US tax implications.

Two other tax advisors also returned my emails and confirmed this as well. So I think the other advisor either did not know, or I didn’t communicate it clearly.

Still so much to figure out but relieved that I can make this work in a tax efficient way.

Thanks again for your answers. Much appreciated!