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US Citizen contracting in UK

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    #31
    Ok I checked my notes and rechecked with my US cpa. Based on their advice doing an election as a disregarded entity is a really bad idea. Because you are treating your limited company differently under two separate tax regimes - transparent in the US and non transparent in the U.K. LLC is not the same as a limited company in the U.K. C Corp is considered the equivalent US entity, hence the need for 5471 etc. Similarly LLCs and partnerships don’t issue dividends like limited companies do. The advice I got is it is best to match your company tax structure as closely as you can in multiple tax regimes to avoid ambiguities in the law. This has all kinds of impacts such as tax treaty implications for double taxation and matching the wording of US tax forms. Treating them differently is at your own risk and you better have a solid legal argument to back it up. A U.K. partnership / sole trader is more like a disregarded entity for tax purposes. My CPA said they confirmed all this with a foreign tax attorney in California.

    Anyways I’ll probably get another opinion with someone else based in the U.K. Goes to show there is no one right answer... and you should ask experts, preferably multiple

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      #32
      Originally posted by hhkb View Post
      I wonder if you have any suggestions? I spoke to two different US CPAs, and based on their advice set up my company as a foreign C-Corp, requiring 5471 and so on. Both said it didn't make sense to mark as disregarded, which may have been bad advice like you said. I've found it difficult to find someone who is knowledgeable that isn't going to charge a fortune.
      I have seen several things online by David Treitel (American Tax Returns - US and UK Tax Experts Tel: 020 8946 0523) that impressed me that he knew what he was about. When we set up our company, I talked to him. For reasons probably not relevant to you, we went a different direction, but his advice was very good. He did not bill me for a phone conversation that was probably 45 minutes.

      It may cost something to get the right advice, especially if ongoing. His advice convinced me that I could probably go disregarded entity as a partnership and still give shares to my wife, with the obvious benefits in UK tax. That has saved me multiple thousands of pounds every year. It is worth paying something. I would have been willing to pay £5K for that 45 minutes, and come out well ahead. I then looked at the US Treasury regs, IRS publications, etc, and it all backed up what he said. It is very clearly permitted to do so (but you generally have to file the election for a disregarded entity very, very soon after forming your company, so you want to get it right from the start).

      Comment


        #33
        Originally posted by hhkb View Post
        Ok I checked my notes and rechecked with my US cpa. Based on their advice doing an election as a disregarded entity is a really bad idea. Because you are treating your limited company differently under two separate tax regimes - transparent in the US and non transparent in the U.K. LLC is not the same as a limited company in the U.K. C Corp is considered the equivalent US entity, hence the need for 5471 etc. Similarly LLCs and partnerships don’t issue dividends like limited companies do. The advice I got is it is best to match your company tax structure as closely as you can in multiple tax regimes to avoid ambiguities in the law. This has all kinds of impacts such as tax treaty implications for double taxation and matching the wording of US tax forms. Treating them differently is at your own risk and you better have a solid legal argument to back it up. A U.K. partnership / sole trader is more like a disregarded entity for tax purposes. My CPA said they confirmed all this with a foreign tax attorney in California.

        Anyways I’ll probably get another opinion with someone else based in the U.K. Goes to show there is no one right answer... and you should ask experts, preferably multiple
        Honestly, that advice reads like it comes from someone who has a lucrative thing going filling out Form 5471.

        Here's the most important section of the tax code. https://www.law.cornell.edu/cfr/text/26/301.7701-3

        Note under (d) that foreign entities can make an election to be disregarded, for US tax purposes.

        As a general rule, the US has not discouraged making this election, because then the company becomes a pass-through entity. You are taxed on all the income (or your share, if a partnership) in the year in which it is received. As a general rule, they like you to pay taxes earlier rather than later, and if it is treated as a corporation for US tax purposes you can defer part of your income, and the taxes on it. They'd rather you not do that. I've never seen anything that says, "Oh, you'd better be careful about filing as a disregarded entity." There's nothing that says anywhere there is any problem with doing this.

        Note also in the link I gave under (f) that it talks about US persons forming a foreign company in the examples, and says they did not file an election to become a partnership. By implication, they clearly could have done so.

        Good luck with it!

        Comment


          #34
          (Deleted my previous reply - don't think it was constructive).

          Thanks for the recommendation WordIsBond. I may see what they say.

          I don't think fees are the reason in my case - I pay a very low fee at the moment including 5471. But I think being a disregarded entity would save me a lot of headache, assuming I could do it (as you say, it is probably too late at this point).

          5471 doesn't seem too bad though, my accountant just takes my P&L and generates it. The main issue this year is around the expat and GILTI taxes, which I think are avoided entirely for disregarded entities. But I don't think anyone expected such crazy taxes.

          There are a lot of people who didn't elect as disregarded entities, because they thought it was the right way to do things, and they are being hit by these new taxes hard. https://www.youtube.com/watch?v=KpPl1UFkIJg is an interesting take on it, from a tax attorney in Israel who is a US citizen and setup his practice with 5471.

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