US Citizen contracting in UK

[jamesbrown]

Thanks for the challenge. I can't back that up, so it appears I may have been fed duff information on it. Helps to reiterate that I am NOT an expert on this stuff.

What I said about it being general category income for the Foreign Tax Credit IS pretty clear from the instructions for Form 1116. But I can't find anything about it in relation to the FEIE. If you want to use FEIE to wipe out US tax liability, you pretty much have to either go umbrella or go with a disregarded entity. In almost every case, I think the disregarded entity is best.

As for the amount of the FEIE, OP said £300 / day. Assuming 230 days a years, that's £69K, which given current exchange rates is well within the FEIE limit. The best advice I could give, actually, is to make more money, rendering the FEIE not a good option.

Again, depending on other factors, the Foreign Tax Credit may be far superior. It also has the advantage that you always pay more UK tax than US tax, so you get a carryforward of your excess tax credit. That can be carried forward for ten years. If you have a year in the future where your UK income is relatively low, having that carryforward could end up being quite beneficial.

The FEIE also makes calculating the Alternative Minimum Tax more complicated. At that level of income, I don't think AMT is an issue, however.

Yeah, you're right, the FEIE should be adequate for the OP. Also, I'm not saying you're wrong about dividend income from a CFC being allowed within the FEIE, but there would have to be a special allowance for that because, in general, dividend and other unearned income is not allowed, so I was just interested if you had any concrete info. on that.

[WordIsBond]

Yeah, you're right, the FEIE should be adequate for the OP. Also, I'm not saying you're wrong about dividend income from a CFC being allowed within the FEIE, but there would have to be a special allowance for that because, in general, dividend and other unearned income is not allowed, so I was just interested if you had any concrete info. on that.

Well, I may not be wrong about it, but after you challenged it, I started digging and couldn't find anything in IRS guidance. It might be in the Treasury regs somewhere, with the IRS not including it in its guidance -- pretty obscure stuff, and tax authorities aren't always the best. I'll ask my friend to push his US accountant on that point and report back if I get anything either way. I'm not likely to want to go digging through the regulations myself.

For now, certainly, no one should rely on what I said on that question.

[Invisiblehand]

Thanks all.

[stek]

Do we know the person in question has the correct leave to be able to contract or are we just assuming that?

[Invisiblehand]

Do we know the person in question has the correct leave to be able to contract or are we just assuming that?

She was born here but moved to the US as a kid.

[stek]

She was born here but moved to the US as a kid.

To a British or settled person?

[WordIsBond]

Well, I may not be wrong about it, but after you challenged it, I started digging and couldn't find anything in IRS guidance. It might be in the Treasury regs somewhere, with the IRS not including it in its guidance -- pretty obscure stuff, and tax authorities aren't always the best. I'll ask my friend to push his US accountant on that point and report back if I get anything either way. I'm not likely to want to go digging through the regulations myself.

For now, certainly, no one should rely on what I said on that question.

OK, this is interesting, I got an answer back.

The argument is that since the income has to be reported as Subpart F income, and therefore has to be reported on 1040 line 21, the principle from 26 1.911-3 b(1) should apply. Link. Relevant text:

Earned income does not include any portion of an amount paid by a corporation which represents a distribution of earnings and profits rather than a reasonable allowance as compensation for personal services actually rendered to the corporation.

The substance of the argument is that income from a corporation is considered foreign earned income only to the extent that it is a "reasonable allowance as compensation for personal services actually rendered to the corporation." Fair enough, that's pretty clear. You can't pay yourself a massive salary when you've done nothing and then claim it was foreign earned income. You have to recategorize some of it, for purposes of the FEIE, as dividend or passive income of some kind.

The argument is that then it should also work the other way. If your salary / dividend income split doesn't reflect a "reasonable allowance as compensation for personal services actually rendered to the corporation," because your salary is too low, you should recategorize some of that for purposes of the exclusion to salary -- basically, it's IR35 in reverse.

There's a logic to it. I can't say the IRS would fight it, or if they did, that you'd lose in the American legal system. But it's a lot simpler to just file as a disregarded entity and not have to do Form 5471. And it's also probably simpler, cleaner, and safer if for some reason 5471 makes more sense for you, to claim the Foreign Tax Credit.

[booms]

CFCs

Resurrecting this thread as there seem to be some well informed comments!

I am a dual UK-US citizen. I have just started contracting in the UK through a UK registered limited company. With an eye on UK tax, I was planning to take only a minimal salary and dividend for the time being.

However, I'm now worried that the retained profits in the company would be counted as Subpart F income, so would be included in my US tax return. One thing that would seem to prevent this is that the UK would not be considered a low tax country, as the current uk corporation tax rate of 19% is above 90% of the new US rate of 21%. My understanding it therefore that I would not end up paying US tax on retained earning of my UK company.

Am I right? Is there a more straightforward way of making sure I don't end up paying US tax? One alternative would be for the company to make a contribution to my pension, which is very efficient for UK tax.

Thanks!

[northernladyuk]

Resurrecting this thread as there seem to be some well informed comments!

I am a dual UK-US citizen. I have just started contracting in the UK through a UK registered limited company. With an eye on UK tax, I was planning to take only a minimal salary and dividend for the time being.

However, I'm now worried that the retained profits in the company would be counted as Subpart F income, so would be included in my US tax return. One thing that would seem to prevent this is that the UK would not be considered a low tax country, as the current uk corporation tax rate of 19% is above 90% of the new US rate of 21%. My understanding it therefore that I would not end up paying US tax on retained earning of my UK company.

Am I right? Is there a more straightforward way of making sure I don't end up paying US tax? One alternative would be for the company to make a contribution to my pension, which is very efficient for UK tax.

Thanks!

Is renouncing US citizenship an option?

[jamesbrown]

Resurrecting this thread as there seem to be some well informed comments!

I am a dual UK-US citizen. I have just started contracting in the UK through a UK registered limited company. With an eye on UK tax, I was planning to take only a minimal salary and dividend for the time being.

However, I'm now worried that the retained profits in the company would be counted as Subpart F income, so would be included in my US tax return. One thing that would seem to prevent this is that the UK would not be considered a low tax country, as the current uk corporation tax rate of 19% is above 90% of the new US rate of 21%. My understanding it therefore that I would not end up paying US tax on retained earning of my UK company.

Am I right? Is there a more straightforward way of making sure I don't end up paying US tax? One alternative would be for the company to make a contribution to my pension, which is very efficient for UK tax.

Thanks!

First, get some professional advice. Seriously. You won't get advice here that is focused on your circumstances, and routes to tax efficiency in the UK are frequently not recognized in the US and vice versa (e.g. ISAs, SIPPs), which becomes an issue when you expect they are.

Second, you should also bear in mind the recent U.S. tax reforms, which are punitive towards owners of controlled foreign corporations of all sizes. Last I heard, small companies were very much in the cross-hairs of the 15.5% deemed repatriation tax (i.e. no fix in sight), so I doubt you want to retain earnings anyway.