Business Tax - 17 Oct 2018
As you grow you may find yourself more and more confused with the complexities of the tax system, even more so if you are thinking of expanding out into the US.
Whether an individual or a business, the way in which the US may tax you is different. They may speak a similar language, but it is, after all, a foreign country. For a start, it is a federal system and both the federal as well as state authorities may tax you, even some local areas like New York City can do so. As a result sometimes, attractive headline rates of individual or corporate tax may appear to be not so appealing after all, particularly in states like California or New York. Of course, the real issue is not just what US taxes there may be but rather how your UK and US tax positions may overlap or offset. It is crucial therefore to take clear, helpful advice on how the systems interact if you have feet in both camps, this generally needs specialist advice with an awareness of both systems.
Non-US residents can be taxed on US sources of income, while a US tax resident is taxable on worldwide income or gains and remember that this is determined in accord with US tax rules and in US Dollars. Generally, US federal tax residence is determined under a day count test, but a US citizen or a greencard holder are actually considered US tax resident even if living outside the US. State Tax residence will be determined under different rules that may vary by state.
Someone moving to the US needs to be aware that the US has special rules applying to certain non-US investments, e.g. UK unit trusts, ISAs and insurance backed products, as well as their being additional reporting obligations in respect of non-US bank, financial accounts and investments.
Business and Business Owners
The good news is that the applicable rate of US federal corporation tax has recently fallen from an average rate of 35% down to 21%. However, for business owners’ complex rules can apply if they or their business becomes US tax resident. In the past the US exposure on overseas corporations owned by US residents was more limited but in December 2017, US tax reform imposed a new tax on the retained earnings and profits of US controlled non-US companies. The new rules bring into scope most non-US business income and some businesses may consider it ‘bad’ for these purposes. The result being that the corporate profits can be currently taxable whether or not distributed out. US tax or tax reporting issues can also arise for US subsidiaries that are part of a non-US owned group of companies, and so this also has to be considered in structuring US operations. Any business looking to set up in the US has to consider the tax position of any staff that will be working or living there and have to consider carefully the most appropriate entities to operate through. Navigating these complex tax systems and understanding how the UK and US may or may not work together may determine the success or failure of any expansion into this biggest of markets.
Frank Hirth is an award-winning firm of international tax specialists with a comprehensive knowledge of both the UK and US tax systems developed over 40 years.
We understand the enormous task of setting up and running a business. At Frank Hirth we can provide clear advice that can guide you through the two systems and help you set up and run your business successfully.
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