Many entrepreneurs who dream of access to the US market often overlook the critical importance of comprehensive tax planning, leading to significant issues that might jeopardize both their personal finances and their business outlook. Failure to effectively navigate through corporate and individual tax issues can potentially lead to considerable losses and thwart a successful US market entry. Proper planning, however, could mitigate these challenges or prevent them entirely.
To gain a better understanding of these complexities, let’s take a look at the hypothetical case of a UK limited company that wishes to establish a US subsidiary. When a key executive relocates to the US while maintaining their management role with the UK parent company, a risk arises of creating a permanent establishment for the foreign entity. This requires allocation of income and expenses to US operations and may necessitate federal and potentially state tax filings.
Corporate tax risks also loom in situations where an executive continues to sanction contracts on behalf of the foreign company. Such actions can be perceived as establishing a permanent establishment, which would repeat the requirements of income and expense distribution, and the necessity for tax filings. Business models can further complicate the issue, particularly when UK companies sell directly to the US or if the US subsidiary acts as a distributor.
Addressing transfer pricing for inter-company transactions is crucial from the outset in order to avoid scrutiny and potential double taxation. It is recommended that the executive’s role should be defined precisely, documented, and consistently followed. Furthermore, filing a US tax return, Form 1120-F, is advised to protect against potential disputes.
Turning to individual taxation, many entrepreneurs stay on the UK payroll for simplicity reasons. However, this approach can result in legal and tax complexities. For instance, an individual working in the US and their employer are subject to federal, and potentially state income tax, requiring withholding and payroll taxes. Compliance with these obligations requires a tax identity, a US bank account and regular tax payments.
Failure to exercise proper planning can result in lost opportunities to leverage the benefits of agreements such as the Social Security totalization agreement, which allows executives to remain on the UK national insurance program for up to five years. For US tax residents, taxation extends to a worldwide basis. This makes matters more complicated if a controlling interest in the UK company exists since anti-deferral provisions like Subpart F and GILTI come into play. Section 962 of the US tax code is pertinent in such cases and should be consulted to avoid immediate taxation of the UK corporation’s income to the entrepreneur without an offsetting foreign tax credit.
Further consideration should also be paid to other assets and income sources that are now subject to US taxation, such as potential capital gains tax from selling a UK residence or tax implications from holding certain retirement assets or investments that trigger the passive foreign investment company system.
The importance of appropriate tax planning and advice from professionals both in the origin country and in the US cannot be understated. While the process may seem daunting, with the correct insight and necessary actions, entrepreneurs can make this a rewarding move that allows them to flourish in the expansive US market.
For the original article, visit Bloomberg Tax.