Owning a UK Company and Form 5471
For US taxpayers who own foreign companies, remaining tax compliant can feel onerous. As a small business owner in the UK, US expats can find some relief from filing and tax requirements.
What do I have to do on the US side if I own a UK company?
If you are self-employed and own a UK limited company, this is considered a foreign corporation for US tax purposes. As it’s a foreign corporation, there are informational filing forms that you have to attach to your personal US tax return. You will need to attach Form 5471, which includes several schedules that you will need to complete depending on the category that you fall under. If it is just a small UK company where you own 100% of the shares, you have to attach all of the schedules to your tax return.
What is Form 5471?
Form 5471, or ‘Information Return of US Persons With Respect to Certain Foreign Corporations’, is a filing requirement for certain US citizens or Green Card Holders who are shareholders, officers or directors in a foreign corporation.
What is the GILTI and Transition Tax?
The 2017 Trump Tax Reforms introduced Transition Tax and Global Intangible Low-Taxed Income (GILTI), which eliminates income recognition deferral. Prior to the tax reform, whatever you took out from the company was considered taxable income, and what was left in the company you could defer the income recognition on. You did not necessarily pay tax on the profits until you had made a distribution. With the tax reform, everything sitting in the company (retained earnings and profits) has to be immediately recognised as income. You may not yet have received the funds and therefore do not have the cash flow to pay the taxes on these profits, creating a serious tax burden.
The goal of this new tax rule was to catch big companies that retain and hide their earnings in their offshore companies – however this has caused a lot of issues with small business owners.
Transition Tax, also known as Section 965, requires US shareholders to pay a one-off Transition Tax on untaxed earnings from controlled foreign corporations. The Transition Tax calculates the amount of profit that up until December 31 2017 have not been subject to US tax, and how much tax should apply to this profit. Taxpayers can choose to pay the Transition Tax in instalments over an eight-year period.
Transition Tax is a one-off event for the 2017 tax year, while GILTI is a yearly occurrence beginning in the 2018 tax year.
How does the GILTI tax affect small business owners?
Small business owners are assessed on a case by case and year by year basis. If GILTI tax does not apply, it simplifies everything. You can achieve this by not owning more than 50% of the shareholding of that company.
Is there any way to get around the GILTI filing requirements and tax for UK business owners?
As a UK business owner, you are able to get around the GILTI filing requirements and tax. This is because the UK is considered a ‘high-tax jurisdiction’, as the corporate tax rate is higher than 90% of the US tax rate. UK business owners are exempt from paying the GILTI tax, and do not have to pay taxes on the income that the company earns if it isn’t taken out from the company.
To benefit from this exemption, you need to complete forms and statements attached to your US tax return. You will need to prepare US tax returns for yourself as an individual and US tax returns for the company.
What information is needed for the preparation of foreign corporation returns?
When filing Form 5471 you will need to provide certain financial statements, including a copy of the balance sheet and an income statement showing profit and loss. The values will be converted using IRS exchange rates. In addition, the IRS needs a copy of the statement of incorporation for the company.
Other details will need to be provided, including the address of the company, currency, resident agent of the company, among others. This can be extracted by the IRS from the public records of company house.
However, the IRS can request any of the following additional information:
- Description of the stock
- Description of certain US shareholders
- The current earnings and profits
- A summary of shareholder’s income
- Party transactions
What if my company’s tax year does not align with the US tax year?
The UK tax year does not match US tax year, and to make it even more complicated, a UK company can have any financial tax year period it likes. You don’t need to worry – just make sure that the first page of Form 5471 discloses the company’s tax year. What’s really important is the income recognition.
Form 5471 and the required schedules are due with the income tax return of the affected shareholder or owner.
What are the penalties for failing to file Form 5471?
For each year failing to file Form 5471 when it is required, there is a penalty of $10,000 USD. If the taxpayer is notified by the IRS of their filing requirement, the penalty will then become $10,000 USD per month to a maximum of $50,000 USD. A 10% reduction in any foreign tax credits claimed from the foreign corporation may also apply.
Is there any relief for doing 5471’s?
If you are self-employed and own a UK limited company, completing Form 5471 is still complicated, and paying a tax professional can be expensive. The IRS estimates that it can take between 30-40 hours to complete this form. Is there any relief?
Yes, there is an election available to treat you as self-employed individual for US tax purposes, which eliminates most of the foreign corporation related paperwork. If you make this election, you will be treated as a self-employed individual and won’t need to prepare all 5471’s. You will, however, have the income of the company flow through your tax return on Schedule C (self-employment schedule). This is not beneficial to everyone because of the self-employment taxes that go with it.
Is the self-employment election beneficial for UK small business owners?
However, for UK small business owners, it is best to consider this election as UK residents are not required to pay self-employment taxes because of the UK-US Totalisation Agreement. So, all you have to really do is pay income tax on the profit of the company, which you can get around with Foreign Tax Credit for UK taxes paid to HMRC. Timing is essential for filing the self-employment election – no earlier than 75 days before form is filed.
Form 5471 has to be completed on a yearly basis, but the election only needs to be done once and then for all tax years to come you are considered self-employed.
Key takeaway for US persons owning UK businesses
To put it simply, if you are self-employed in the UK with a small limited company, there is no real GILTI to worry about and you can get out of the 5471 filing requirements, making it much cheaper in terms of tax preparation fees. By paying taxes in the UK, there is effectively no US tax to pay, no GILTI to worry about, and no foreign corporation returns.