Saving taxes with international tax planning in the UK
The U.K. is a fantastic European headquarters. Of course, they left the EU and despite this, the U.K. is my first choice. Both Switzerland and The Netherlands would like to be your headquarters. But they are missing the tax infrastructures that best fits the American tax laws.
The Big Tax Strategies of the U.K. are:
1. They treat the U.S. limited liability company (LLC) as a passthrough. The U.K. is the only country that has the identical treatment as the United States. The cornerstone of small business international tax planning is the foreign tax credit.
The foreign tax credit is the method of avoiding double taxation. For example, you earn a $1,000 in the U.K. and the tax is $2,000 (the U.K. has a low tax rate). The U.S. tax on the $1,000 is $3,900. The $3,900 is reduced by the $1,000.
U.S.-U.K. Income Tax Treaty and the Friendship, Commerce and Navigation (FCN) Treaty Tax Planning and Strategy
This is big. You can use domestic (I prefer Nevada) LLC for your international business. An early 1900 treaty (FCN) allows the LLC the same rights in the U.K. as a U.K. company.
The British Inland Revenue changed their regulations to match the IRS regulations regarding the American LLC. This allows the income tax treaty’s permanent establishment clause to protect you from U.K. taxation. While the foreign tax credit does mitigate U.K. taxes, it is nice to be exempt from taxation.
The U.S. LLC Without a U.K. permanent establishment is treated as if it was only doing business in the U.S. As you read below, the word term that is vague is “office”. When tax treaties were envisioned, an office would have staff completing orders along with a “place of management”. With E-commerce websites placing orders, I suggest that the computer server is kept in the U.S.
The term “permanent establishment” includes:
a) a place of management;
b) a branch;
c) an office;
d) a factory;
e) a workshop; and
f) a mine, an oil or gas well, a quarry, or any other place of extraction of natural
The term “permanent establishment” does not to include:
a) the use of facilities solely for the purpose of storage, display or delivery of
goods or merchandise belonging to the enterprise;
b) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of storage, display or delivery;
c) the maintenance of a stock of goods or merchandise belonging to the
enterprise solely for the purpose of processing by another enterprise;
d) the maintenance of a fixed place of business solely for the purpose of
purchasing goods or merchandise, or of collecting information, for the enterprise;
Avoiding IRS Form 5471 Controlled Foreign Corporation
Form 5471 is a complex tax return. CPA fees start at $5,000. Next, tax planning for the controlled foreign corporation is tricky. Even the best tax planners can miss the target.
Using the foreign tax credit to reduce your taxes is by far the best way. When a domestic LLC is used you do not file the Form 5471. Matter of fact, if you are the only owner, you do not file any IRS form. The LLC files a partnership return, Form 1065, when more than one person owns the LLC.