Understanding and navigating US Tax rules
Expanding your business into the US
For many UK businesses, the most confusing part of US expansion can be understanding the transatlantic tax implications and the US tax system.
Our US UK Private Client team specialise in helping people navigate the US and UK tax rules. Our US Expansion team aim to provide the same service to businesses.
The team provide practical advice to business owners and CFOs looking to expand into the US market and ensure all required US federal and state Corporate Tax filings are satisfied on a timely basis.
The following information has been collated through our experience of helping businesses with their US expansion and is intended to help transatlantic business managers understand the US tax rules that apply to businesses expanding into the US.
Glossary of terms
US Trade or Business
Considerable, continuous and regular operation in the US
Permanent Establishment
Generally, a fixed place of business including a branch, office, factory workshop or place of management
Effectively Connected Income
Income that is connected with the operations of a US trade or business
Nexus
A connection between a business and a state which triggers state taxation
Expanding into the US
The US market represents a huge opportunity for UK businesses, and through the use of modern technology, engaging US-based customers is easier than ever. However, any business considering expanding into the US needs to be aware of the complexities of the US tax system.
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.
If you live in the UK and invest in the USA, then beware of the US Limited Liability Company (LLC)
US LLCs are a type of private limited company. They offer investors limited liability and also have an attractive tax profile under the US Internal Revenue Code.
This combination has resulted in LLCs being widely used in the USA as pooled investment vehicles. Such structures raise no issues for the investor who is resident in the USA. However, the picture can change dramatically in an international context.
W-8 series forms
The W-8 series forms are US tax forms which must be completed by non-US persons (individuals or entities) who receive payments from sources in the United States. Payments can include interest, dividends, rents, royalties, compensation, or business revenue paid by someone in the US to a non-US person or business.
These forms tell the US tax authorities the US tax status of the non-US person or business, and any tax treaty benefits they are entitled to claim. These forms also comply with the Foreign Account Tax Compliance Act (FATCA), which aims to stop tax evasion by US persons who have foreign accounts or assets.
By completing these forms, non-US persons can reduce their exposure to US federal tax withholding, as well as penalties or sanctions which may apply in relation to non-compliance.
US Insights Beneficial Ownership Information Reporting
New reporting requirements, which take effect from 1 January 2024, require most US corporations and limited liability companies, as well as most non-US entities that are registered to do business in the US, to report information about their beneficial owners to the US Treasury Financial Crimes Enforcement Network (FinCEN).
US Insights
Access our full range of US Insights videos and accompanying articles where our US UK Private Client team explain some of the key tax considerations for US citizens living in the UK.
To help transatlantic business owners plan for the year ahead, we have prepared a calendar which details all the relevant US & UK corporate tax filing & payments dates in one place.
Podcast: BRave Business
Expanding from the UK to the US
In this episode we take a look at the key considerations for expanding your UK business to the US. What expansion options are available to you, which kind of businesses tend to succeed, and what are some of the common challenges UK businesses face?
Joining Declan for the conversation are Blick Rothenberg’s US UK Private Client Partner Michael Holland and our guest Brad Doline, Of Counsel at law firm Wilson Sonsini.
US Expansion – 12 Steps
A. Understand the US market. Each US state imposes its own laws, tax systems and business practices. Think carefully about who your clients are, where they will consume your services, and how you will deliver for your clients.
B. Speak to a US expansion advisor.
A. Before you can determine the most appropriate structure for your new US business, you need to understand the rules of the game and the way the US tax system works. US tax can be complex, and the interaction with the UK can create some unexpected results.
B. Speak to a US/UK tax expert.
A. Sales and use tax is the US equivalent of the UK VAT system. However, rather than a single system applying to the US, each state imposes its own rules and rates. The appropriate rate of sales and use tax varies from state to state and on each type of good or service sold.
B. Speak to a sales and use tax expert.
A. How you structure your new US business will depend on a number of variables and circumstances personal to you and your business. The location of your staff and customers, the way you deliver your goods and use your intellectual property, your planned investment and exit strategy, and even the personal plans of the business owner can all influence the best structure to use.
i. Some businesses need little physical presence in the US and can service US customers remotely. These businesses may opt to use a UK limited company and rely on the US/UK tax treaty for protection from US federal Corporate Tax.
ii. Some businesses may need a small, temporary, or seasonal local presence, or a store of goods in the US. These businesses may decide to continue servicing clients remotely for the most part and use US contractors and storage facilities to meet the business needs while still benefiting from the US/UK tax treaty protection. In this structure care must be taken not to accidently create a permanent establishment.
iii. Some businesses may want to limit their liability risk in the US and may opt to use a US LLC. A US LLC is a type of business entity that can help to limit the personal liability of its owners. This means that if the business is sued, the owners’ personal assets are not at risk. While much of the advice found through search engines suggest a LLC is the easiest way to start a US business, this advice doesn’t consider the UK implications of LLC ownership and, in many cases, can lead to unexpected and costly tax issues.
iv. Many businesses will want to limit their exposure to US taxation, and the overall businesses risk. In order to ringfence the business’ US tax risk to single corporate subsidiary, many businesses will use a C Corporation. A C Corporation is the closest US equivalent to a UK limited company and is a separate legal and taxable entity.
B.Speak to a US/UK tax expert.
A. All business entities in the US are incorporated under a state’s law, and the state you chose to incorporate under will depend on your business location, customers, and operations. For many, a Delaware entity makes the most sense due to the state’s business-friendly case law, low franchise tax rates and cheap administration costs associated with operating a business, however other states also offer similar advantages. The state in which the business is incorporated is not necessarily the state in which the business pays state tax. A Delaware C Corporation which services customers located in New York will be subject to New York state tax rules on a proportion of its income due to the location of its customers which creates nexus.
B. Speak to US/UK tax expert.
A. A common requirement to incorporate a business in a state is that the business engages a registered agent in that state. A registered agent receives correspondence on behalf of a business. Registered agents offer a low-cost service to receive mail and help with many of the state legal filings required to register and maintain a business with a state’s authorities.
B. Engage a registered agent.
A. An EIN is essentially a Social Security Number for a business. This is the US tax identification number listed on all tax documents and used by the tax authorities to track a business. An EIN must be obtained before a business can begin trading, start a payroll or open a bank account and so is one of the most important steps to take. Applying for an EIN is a simple process for businesses controlled by Americans; however, the application process can be more complicated for non-Americans. For non-Americans looking to start a US business it is a good idea to work with a third-party designee who can help you through the process.
B. Speak to our team about obtaining an EIN quickly.
A. To make and receive payments with US counterparts, receive investment, or even pay your US taxes, a business will need a US bank account. As the US and UK banking systems have some significant differences, this causes unexpected headaches when only operating a US business using a non-US bank account.
B. Speak to a US bank account provider.
A. Many UK business owners are surprised to learn that statutory accounts, like those filed annually with HMRC, are not a requirement for unregulated US businesses. Instead, US Corporate Tax returns include many of the additional details disclosed in the UK statutory accounts. Many businesses opt to use online accounting software such as Xero or QuickBooks to complete the bookkeeping for the US entity, and prepare the trial balance, income statement and balance sheets required to complete the US tax filings.
B.Set up your bookkeeping software.
A. To deliver your services to your new US clients you might need a team based in the US. The US employment laws and culture are different from UK and vary from state to state. Whether you are employing local employees, or seconding existing employees from the UK, you will need to ensure the business complies with the applicable complex payroll, employment, and immigration rules.
B. Speak to US HR and immigration advisors.
A. The US is a particularly litigious jurisdiction, and due to the nature of the US legal system it’s more likely that a business may be subject to a legal claim. Therefore, it’s important to ensure your business insurance offers appropriate coverage for the US operations.
B. Speak to your business insurance provider.
A. A US business is required to file federal and state Corporation Tax returns annually, by a due date which is relative to the business year end. While extensions are available to help businesses file their returns on time, penalties can be imposed by the tax authorities on US businesses who fail to pay or file on time. Significant penalties apply to filings that report interactions with non-US parties (such as shareholders and group companies) which mean it’s extremely important transatlantic businesses file accurate tax returns on a timely basis each year.
B. Speak with a US tax advisor who has experience helping transatlantic businesses.
Our expert team
US Corporate Tax
US Corporate tax can be complicated, and for businesses subject to both US & UK tax rules the situation can quickly become overwhelming.
Transatlantic businesses are subject to additional US tax reporting requirements, many of which are subject to significant ‘failure to file’ penalties.
While many domestic advisors are adept at domestic US corporation tax reporting, very few are able to provide joined up US & UK advice and compliance services.
Whether you are a start-up entrepreneur, a wealthy family with complex affairs, or a business executive, our dual-qualified team of tax advisers will look after your US UK personal tax affairs as well as those of your business.
If you wish us to contact you or want to discuss your situation, please complete the form below and one of our team will be in touch.
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