Your U.S. entity choice should be driven by this choice and how this choice integrates with the objectives of your owners.
The choice of entity in the US should reflect your intentions and objectives. There is no “one size fits all” model and establishing the right structure from the outset is imperative to ensure that you understand the compliance requirements and that the overarching business objectives are being achieved. When looking to enter the US market, the two most common entities choices are a Limited Liability Company (LLC) or a C-Corporation.
A C-Corporation is similar in nature to a UK private limited company. C-Corporations are independent businesses and are subject to corporate tax on profits. Taxes are also paid on the dividends paid to shareholders, which can result in double taxation on the same income. In the international tax context where non-US shareholders are involved, it is important to consider the withholding tax on dividends paid to foreign shareholders and the availability of tax credits to foreign shareholding structure.
LLCs are treated as pass through entities, although the member or members are not liable for losses incurred by the business. Foreign members of LLCs are responsible to file a US tax return on income sourced in the US on an annual basis.
Each entity choice has its pros and cons, which should be considered, against the business objectives long-term goals of the shareholders.
Understanding the corporate tax residency rules in the UK and the US is important for global families and founders to ensure that unintended consequences are not triggered with the HRMC and the IRS. The residency rules in the UK are substantially different to the rules in the US and failing to properly plan can often lead to costly tax and compliance issues.
A company will be a UK tax resident if it is incorporated in the UK or if it is centrally managed and controlled in the UK. Whether central management and control is deemed to be in the UK is determined by looking at whether the key management decisions are being made by UK resident directors. As such, although companies may be formed in a different jurisdiction, if a UK resident director is making key management and operational decisions, the company’s profits and gains may be subject to tax in the UK on the basis of UK residency.
The US rules relating to corporate tax residency are far more straightforward. A corporation is considered a US tax resident if it is incorporated in the US. However, foreign businesses may be subject to tax in the US if they generate income that is effectively connected to a US trade or business or Fixed, Determinable, Annual and Periodic (FDAP).
|US and UK corporate tax comparison|
|Corporate tax rate||19%/30%||21%||N/A|
|Withholding tax on dividends||0%||30%||5%/15%|
|WHT on royalties||20%||30%||Exempt|
|WHT on interest||20%||0%/30%||Exempt|
|Non-Portfolio Dividend Exemption||0%||100% Dividend Received Deduction (DRD)|
|Participation Exemption (sales of shares in sub)||Exempt||DRD||Section 1248 generally provides that the gain on the sale of CFC stock is treated as a dividend to the extent of the undistributed and untaxed earnings of the CFC. Thus, upon the sale of a CFC, an exemption from gain would be available to the extent that the gain is treated as a dividend, as such dividends qualify for the exemption system described above.
If you are planning to move from the UK to the U.S. or spend a substantial amount of time in the U.S., it is important to consider the impact of your travel on your residency status. A change in residence can directly impact which jurisdiction has taxing rights over your income and assets and how your financial affairs should be reported with tax authorities and financial institutions.
The U.S. taxes U.S. Persons, as defined in the Internal Revenue Code 1986 (the Code), on a worldwide basis and non-residents on U.S. sourced income only. You are considered a U.S. Person if you are a citizen or ‘resident of the United States’. You are considered a resident of the U.S. if you are a green card holder, meet the requirements of the ‘substantial presence test’ (SPT), or elect to be taxed as a U.S. Person.
You will meet the requirements of the SPT if you spend more than 183 days in the U.S. in a calendar year or are deemed to have spent more than 183 days in the U.S. in a calendar year. For the SPT to apply, you must have spent at least 31 days in the U.S. in the current year and applying the following formula yield 183 or greater:
The UK provides a Statutory Residence Test (SRT) to determine the tax residence status of individuals with connections to the UK. The SRT is complex, however, vital to understand your UK tax residence status. If you are considered a UK tax resident your worldwide income is subject to UK tax, and failure to correctly declare and pay tax on any income could lead to penalties and fines.
The SRT sets out four tests:
Each test in the SRT has specific criteria, which should be analyzed to determine whether you retain your UK tax residence in your specific circumstances.
Structuring for passive investment in the U.S. from the U.K. requires an understanding of residency rules, the characterization of income or capital gains in both countries, the U.S. and U.K. withholding tax rates, the entity classification rules in the U.S. and how they impact U.K. entities.
It also requires an understanding of the Estate Tax rules and how they will impact a U.S. and U.K. asset base.
For global families, it is important to understand the comparative economic difference between U.S. and U.K. investment structures and how to ensure you maximize your after tax returns.
The structure of U.S.- UK deals will be dependent on whether the acquirer is looking to buy the entire business or the U.S. business only and tax residence of the acquirer.
If the acquirer is based in the U.S. they may not have a desire to operate the business through a UK holding company or operating company structure. In our experience, it will be the business objectives of the acquirer that will dictate the legal and economic structure of the deal.
It is important that you are aware of the following U.S. tax issues that will reduce the value of a business in a U.S.- UK deal: