US Corporation Tax issues for UK limited companies engaged in a US trade
US Corporation Tax issues for UK limited companies engaged in a US trade
Are you a non-US company doing business in the US? Do you know if you are subject to US Corporation Tax?
The tax requirements for non-US businesses engaged in a US trade can be complicated and require careful planning.
When is a non-US business subject to US Corporation Tax?
A non-US corporation that is engaged in a US trade is subject to US Corporation Tax on the net taxable profits of that US trade.
In this situation the non-US corporation would be required to file federal (and potentially state) Corporation Tax returns annually and pay federal and state Corporation Tax on the net taxable profit of the US trade.
US Federal Corporation Tax is currently charged at a flat rate of 21%, and state Corporation Tax rates range from 0% to 9.99%.
When is a foreign business engaged in a US trade?
The determination of whether a foreign business is engaged in a US trade is based on the specific facts and circumstances of the case. Both the nature and extent of the foreign business’ US operations are particularly relevant, as well as whether the foreign business undertakes the activities directly, or using local agents.
Generally, if the US operations of the foreign business are ’considerable, continuous and regular’ and the activities are ’active’ in nature, then a US trade is deemed to exist.
What about UK limited companies?
Thanks to the US/UK tax treaty, a UK limited company engaged in a US trade is only subject to Federal Corporation Tax on the net taxable profits of that US trade if the UK limited company conducts the trade through a permanent establishment (PE) in the US.
A UK limited company engaged in a US trade that is not conducted through a PE in the US is not subject to Federal Corporation Tax on the net taxable profits of that US trade.
What is a Permanent Establishment (PE)?
A permanent establishment (PE) is a concept defined in the US/UK tax treaty as a fixed place of business, including a branch, office, factory, workshop or place of management. The treaty also specifically excludes certain operations (such as a store of goods in a warehouse) from constituting a PE and provides further context around the creation of a PE when working with local brokers and agents.
The application of the treaty to a UK limited company’s facts and circumstances can be difficult and needs to be reviewed annually as business operations evolve quickly.
Creates a PE
- A place of management
- A branch
- An office
- A factory
- A mine, well, quarry, other place of natural resource extraction
Does not create a PE
- Facilities used soley for purposes of storage, display or delivery of goods
- A fixed place of business maintained soley for the purpose of purchasing goods, collecting information, preparatory or auxiliary purposes of the business
- The use of an independent agent (providing they are acting in the ordinary course of their business)
Sometimes a PE
- A building site or installation project if last >12 months
- The use of an agent (other than an independent agent) if they have authority to conclude contracts, and habitually do so
What about state tax?
The US/UK tax treaty is an agreement between HMRC and the US federal government and so only provides protection from Federal Corporation Tax. This means that a UK limited company engaged in a US trade that is not conducted through a PE may still be subject to state Corporation Tax rules.
A UK limited company will be subject to state Corporation Tax in all states in which it has an economic connection which is referred to as ‘nexus’. As with the application of the treaty PE definition, a UK limited companies state nexus should be considered and reviewed often, particularly when engaging a new US client.
What about UK tax?
A UK limited company is subject to UK Corporation Tax on its worldwide taxable profits. Where a UK limited company is engaged in a US trade through a PE in the US it will also be subject to US Federal Corporation Tax on the net taxable profits of that US trade. If not for the US/UK tax treaty the US profits would be subject to both UK and US Federal Corporation Tax.
In order to mitigate double taxation, the US/UK double taxation treaty includes a provision which allows a UK company to claim a credit against its UK tax liability for US tax that has been paid on US trade profits.
What US tax filings are required?
Every non-US corporation that is engaged in a US trade is required to file a US Federal Corporation Tax return annually, using Form 1120-F.
A UK limited company engaged in a US trade that is conducted through a PE in the US is required to file a comprehensive Form 1120-F which includes an income statement, balance sheet and reconciliation of book to taxable income.
A UK limited company engaged in a US trade that is not conducted through a PE in the US is required to file an abridged Form 1120-F with a Form 8833 which explains how the business meets the conditions set out in the US/UK tax treaty and is therefore not subject to US Federal Corporation Tax.
What happens if a business doesn’t file its required US tax filings?
While late and non-filing penalties can be levied by the IRS, the greatest potential consequence of not timely filing a US federal Corporation Tax return is the potential denial of deductions by the IRS.
If a UK limited company is later found to have been engaged in a US trade through a US PE the UK limited company will be subject to US Federal Corporation Tax on a gross income basis, unless all required tax returns have been timely filed. If all required tax returns were filed by the prescribed due date the UK limited company will be subject to US Federal Corporation Tax on a net profits basis.
It is also important to ensure all required US tax returns are filed if the UK limited company is seeking to be purchased by a US buyer. As part of the purchase due diligence the US buyer will review the US tax filing obligations of the foreign business and can look to renegotiate the purchase price if these filings have not been timely filed.
If a UK limited company is conducting ‘considerable, continuous and regular’ business with clients based in the US they should speak with a US tax professional to carefully consider the exposure to US federal and state Corporation Tax and resolve any tax obligations before taking the next steps on their expansion into the US journey.
Would you like to know more?
If you would like to discuss how the above may affect you and your tax affairs, please get in touch with your usual Blick Rothenberg contact, or one of the team using the form below.
Personal tax is one of the most complex areas of wealth management and can significantly erode your wealth over time
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