UK/USA Dual Citizen Question - Taxes

[UKLonghorn]

Hi folks,

Any other dual citizens out there? As a dual UK / USA citizen, the USA requires us to file USA taxes every year - even if we have been out of the country for a long time. The USA is one of the few countries that do this.

I have a UK based tax firm that does my USA and UK "personal" taxes. I also have a UK firm that does my accounting and my "business taxes" for my technical consulting business. I have only been "independent" for a year and have my own limited company. I am not working under IR35.

My USA/UK tax guy said the following to me the other day which I find very strange:

"The company should not retain profits as this does not work for US tax purposes. Any retained profits should be distributed within the calendar year."

Just because money is in my company account - it does not mean it is "profit". I am going to circle back on this but any ideas what he could mean? Thanks!

[Fred Bloggs]

First port of call needs to be the UK/USA dual tax treaty. That covers both personal and corporate income and distributions. I have been dual tax national and even triple tax national the last few years. I find the treaties very useful indeed and relatively easy to understand. I'd frame your questions to your adviser having read and understtod the treaty first. Then, it's much less likely you'll be misled or misunderstand.

[BlasterBates]

The thing to bear in mind is that the US has no jurisdiction in the UK, so whatever rules they may apply in the US don't apply in the UK. You simply fill out your US tax form and interpret it literally. Even if someone there might not agree with UK tax law and how it applies to US citizens is, he is in no position to check.

I would therefore read up and get a second opinion as, but the way I see it as you're not even resident in the US no-one there is going to scour your tax return.

[Maslins]

My USA/UK tax guy said the following to me the other day which I find very strange:

"The company should not retain profits as this does not work for US tax purposes. Any retained profits should be distributed within the calendar year."

Just because money is in my company account - it does not mean it is "profit". I am going to circle back on this but any ideas what he could mean? Thanks!

One of our clients who's a US citizen got told something similar by their US accountant too. Whilst it sounds daft, I think it's a (poor) attempt by the US to prevent US citizens making lots of money via an overseas entity (so only suffers tax overseas) that they leave all those profits in the company (so no US tax paid as personal income low). The specific client I'm thinking of was winding down a bit anyway, so is going to trade as a sole trader going forwards. I appreciate for most contractors that wouldn't be an option.

Chant it with me now, "USA, USA, USA!"

[WordIsBond]

"The company should not retain profits as this does not work for US tax purposes. Any retained profits should be distributed within the calendar year."

Just because money is in my company account - it does not mean it is "profit". I am going to circle back on this but any ideas what he could mean? Thanks!

Money still in your account that is not due in Corporation Tax or offset by another liability is 'retained profits'. It is profits from a prior year that have not been disbursed.

He is undoubtedly referring to the GILTI tax. You can use Google. His statement is somewhat simplistic, it isn't true in every case. It particularly isn't true if you filed for your UK limited to be treated as a disregarded entity for US tax purposes, which you probably should have.

Maslins, your client could have filed as a disregarded entity for US tax purposes, and had the benefit of UK Ltd taxation here in the UK and been taxed as self-employed in the US. In that scenario, his corporation tax and personal (dividend) tax can be used as a foreign tax credit to offset his income tax in the US. If any of your clients are using a US tax advisor who can't talk intelligently about the pros/cons of such an approach they need to find another one quickly.

OP, I'm not going to rewrite what I and others have written before. If you read this thread (https://www.contractoruk.com/forums/...questions.html), and follow the links and read those discussions (and other stuff which may be linked in them), you'll learn something about your options.

If you already have a UK Limited, and it has retained profits, and it isn't already a disregarded entity, then you probably have to deal with the GILTI tax. But you may want to file as a disregarded entity now so you don't have that issue going forward. You need to ask your US tax advisor about this and see if he sounds intelligent about it, and if so, what he advises.

I'm willing to answer questions you have about the prior discussions but don't have time to recreate it. Please have a read.

[WordIsBond]

I would therefore read up and get a second opinion as, but the way I see it as you're not even resident in the US no-one there is going to scour your tax return.

You aren't a US citizen, are you?

The US has worldwide taxation of citizens and you can be extradited to the US. They see expats as a cash cow, so they pass all kinds of onerous stuff. You can get slapped with tax on currency gains just by remortgaging if the USD/GBP exchange rate is more favourable at the time of remortgaging than it was when you took out the mortgage. You can get hammered just by buying a fund in your ISA. And quite a few European banks won't even take US clients because the US has such heavy reporting requirements to enable them to catch US citizens abroad who don't report / pay tax on absolutely everything.

I don't think you should be advising a US citizen to be blase about this.

[BlasterBates]

You aren't a US citizen, are you?

The US has worldwide taxation of citizens and you can be extradited to the US. They see expats as a cash cow, so they pass all kinds of onerous stuff. You can get slapped with tax on currency gains just by remortgaging if the USD/GBP exchange rate is more favourable at the time of remortgaging than it was when you took out the mortgage. You can get hammered just by buying a fund in your ISA. And quite a few European banks won't even take US clients because the US has such heavy reporting requirements to enable them to catch US citizens abroad who don't report / pay tax on absolutely everything.

I don't think you should be advising a US citizen to be blase about this.

The US citizens I know are

[WordIsBond]

The US citizens I know are

Ah, the good old "I haven't been caught yet so it must be fine" approach.

They might be right, of course. But the whole point of FATCA especially was to make it easy for them to track who isn't reporting everything to their standards, and nail them.

[Maslins]

Maslins, your client could have filed as a disregarded entity for US tax purposes, and had the benefit of UK Ltd taxation here in the UK and been taxed as self-employed in the US. In that scenario, his corporation tax and personal (dividend) tax can be used as a foreign tax credit to offset his income tax in the US. If any of your clients are using a US tax advisor who can't talk intelligently about the pros/cons of such an approach they need to find another one quickly.

You may well be right, but if so you're disagreeing with their US accountant, not me. I did think it sounded daft, but didn't feel my place to challenge it! Also I note revisiting the forwarded email from the US accountant, it was in Oct 18 and they suggested at the end it was just proposed legislation and they were hoping for late tweaks to reduce the impact before the final regulations.

This particular client's income is modest and they were considering going sole trader anyway. Rightly or wrongly GILTI seemed to push them into this sooner than they might otherwise have done.

[WordIsBond]

This particular client's income is modest and they were considering going sole trader anyway.

In which case it may have been best all round, and that may have factored into the advice he was given. An advisor should be able to talk discuss the different options, not necessarily advise everyone to take the same approach. Perhaps his US advisor did discuss it with him and he didn't find it necessary to pass that part of the discussion along to you.

But if you were my UK accountant and I told you I was getting US advice that sounded daft to you, I think I'd want you to say so. There seems to be quite a range in quality of US accountants here in the UK.