The Impact of the Repatriation Tax on American Business Owners in the UK
How are Americans who own businesses in the UK affected by the US Tax Reforms?
This article focuses on the Repatriation Tax created by the 2017 US Tax Reform and its impact on American business owners who live in the UK. The Repatriation tax was aimed at large US companies like Apple and Google who for years had shifted trillions of dollars to off-shore subsidiaries to avoid high US Corporate tax rates. The Repatriation tax forced these multinationals to pay a one-time tax on profits they had hoarded in these subsidiaries (called CFCs -controlled foreign corporations). Under the reform, all profits that accumulated between 1986 through December 31, 2017 are treated as income to their US parent company (Apple and Google, for example) and taxed at 15.5% for profits held in cash form, and 8% for profits held in non-cash form, all from the first dollar of profit.
What does this tax have to do with American expats? Under the Repatriation tax law, US citizens and Green Card holders ("expats") living in the UK are treated is if they are Google US, the parent company. And it treats the UK company in which the expat has an interest as if it were the foreign Google subsidiary. Therefore, if an expat owns at least 10% of a UK corporation, and over 50% of that UK corporation is owned by Americans, that corporation is a CFC for purposes of the tax. Accordingly, the individual US expat will pay the Repatriation Tax with one surprising catch – the expat pays tax at rates higher than Google/Apple: 17.54% on cash and 9.05% on non-cash profits!!
Let's take a numerical example: Assume you are a US citizen living in England and that you are a CPA or owner of a family restaurant. Also assume that you have been operating the business via an English company for 30 years. You are approaching the age of retirement and have saved 100,000 Pounds in your company on which you have paid UK Corporate income taxes. You are counting on this money for old age. Uncle Sam now says that you personally are liable for a Repatriation tax of 17,540 Pounds.
Can the US do this? After all, the Article 7 of the UK-US Tax Treaty ("Treaty") specifically states that the US may not tax a UK company on profits not arising from within the US. The answer is that under the Article 1(4) of the Treaty, the US may tax its citizens as if the Treaty did not exist. So in essence the US looks through the UK company and attributes the accumulated profits (and the resulting tax) to the expat personally.
The Repatriation tax is particularly harmful to expats. In addition to the ordinary considerations for operating a business as a corporation (avoiding personal liability and tax considerations), American expats have an additional compelling reason: avoid double social security! Working through a corporation allows the expat to avoid double social security taxes (US and UK in this case) on her/his wages.
How is this tax paid? In our example, if a proper election is made, the 17,540 Pounds in tax liability can be paid in eight annual payments, with the first payment being due June 15, 2018. Any payment that is even one day late results in the immediate acceleration of all remaining annual payments!
If the UK based expat makes the payment, can the expat seek a tax credit in the UK to avoid being taxed twice (the second time being when the UK taxes the dividend from the company to the expat)? The answer is no. The UK will not grant credits on taxes paid by a UK resident on profits generated in the UK.
So what is an expat to do? Certain options exist: (1) be an ostrich and do nothing, which is not a great solution, especially if the expat has filed Form 5471 in previous returns, (2) consult with a US tax professional. There are numerous ways to plan around the Repatriation tax. It is important to note the June 15, 2018 deadline, and (3) Tax Advocacy. Join the author, expats and expat organizations around the world in fighting to exempt us from laws which were intended for Google and Apple. See www.americansabroadfortaxfairness.org/
US Tax Seminar:
The impact of the 15.5% Repatriation and GILTI taxes on American business owners and professionals living in the England.
The 2017 US tax reform created the Repatriation and GILTI taxes. Although intended for companies like Google and Apple, these taxes severely impact Americans living in England. This seminar, intended for US and English tax professionals and American/English business owners and professionals will explain the laws and how to plan around them.
Thursday May 10, 2018 Time: 09:30 - 12:00
Place: Theobold Room, Monticello House. 45 Russell Square London
Admission free. Registration required at firstname.lastname@example.org
For further details see: www.silvercolaw.com
Monte Silver is a US tax attorney residing outside the US. He previously worked at the Estate & Gift Tax division of the IRS. and at the US Tax Court. He specializes in providing tax solutions to American expats. In addition to having published extensively on the impact of the Repatriation and GILTI taxes on Americans abroad, Mr. Silver has initiated a global tax advocacy effort to exempt expats from these taxes. www.silvercolaw.com