A UK corporation wishing to do business in the United States may do so directly from the United Kingdom, through a US branch, or a US subsidiary. In these cases, consider the federal tax rules below, but beware that state and local taxes and sales taxes may apply. Our team has worked with many UK businesses in the United States and have a trained team ready to help you. We would love to help you with your international business tax issues, please contact us for assistance.
As with most US tax treaties the UK-US tax treaty applies a limitation of benefits clause which is designed to prevent treaty shopping. This clause means that a UK corporation may not avail of the benefits of the tax treaty unless certain ownership conditions and tests are met.
Doing Business Directly from the United Kingdom – If you transact with your clients directly from the United Kingdom and have no presence in the United States, or if you qualify for relief under the UK-US tax treaty and do not have a permanent establishment as defined under the treaty, then you should not be liable for US taxes on your business. If you derive “fixed and determinable” payments (such as royalty, interest, dividends) from US sources then you can be subject to US tax withheld on a gross basis from the payments. Software businesses that receive royalty payments but qualify for treaty relief see this withholding rate reduced to 0%. Likewise interest payments are 0% rated and dividends may also be 0% rated (subject to ownership percentages).
To meet any of these conditions the specific facts of each client should be examined and tested in light of current tax law.
Doing Business with a US Branch or USPresence – A distinction can be drawn between a US branch and a US presence by noting that the level of involvement required to meet the criteria of being a branch or permanent establishment under the treaty is greater than that required to establish that income is effectively connected with a US trade or business.
If you have a physical presence in the United Kingdom but do not operate through a domestic US subsidiary then:
- If you qualify for treaty relief and your presence qualifies as a permanent establishment under the treaty then your branch will suffer federal income tax on its attributable profits and be liable for branch profits and branch interest tax – although the treaty withholding rates may reduce the branch profits and interest taxes to 0% and HMRC will allow you credit for taxes paid.
- If you do not qualify for treaty relief and your U.S. income is effectively connected with a U.S. trade or business then your branch will suffer federal income tax on its profits and be liable for branch profits and branch interest tax. As there is no treaty relief the rate of branch profits and branch interest tax will be 30%.
- If you qualify for treaty relief and your presence does not qualify as a permanent establishment under the treaty then your branch will not pay federal income tax on its profits nor be liable for branch profits and branch interest tax.
Care and professional advice should be taken when structuring your US presence to avoid an inadvertent classification. Please contact our international tax experts for assistance.
Doing Business as a Domestic US Subsidiary – If you conduct your US business through a domestic US subsidiary (such as an Inc. or LLC) this entity will be liable for federal (and state/local) tax on its worldwide income. Distributions to from that company will be liable to federal withholding taxes of up to 30%, but if the UK parent qualifies for treaty relief then this rate can fall to 0%.
U.S. LLC Rules – In the United Kingdom, there is no equivalent of a check-the-box election and thus an entity will be classified as either transparent or opaque. HMRC has viewed US LLCs as opaque with any distribution remitted as a dividend and without any corporate tax credits available for the underlying income tax paid in the United States. This has the effect of double taxation. Despite a recent UK Supreme Court case (Anson / Swift) holding that an LLC can be considered transparent for UK tax purposes, HMRC have restricted that case to the specific facts therein.
A UK corporate taxpayer is exempt from U.K. tax on US dividends received from portfolio companies or controlled companies or derived from ordinary shares. The U.S. applies a withholding tax of 0% or 5% or 15% on dividends dependent on the ownership held by or status of the UK parent. It should also be noted that the IRS applies transfer pricing rules and regulations to businesses operating in the United States.
International business taxes require specialized expertise, contact our experienced team for assistance today.