Tag Archives: avoiding U.S. tax

The United Kingdom Headquarters for your Business

Having a United Kingdom headquarters for your business can save you taxes. With the new tax law,  the U.K. has a special tax advantage. 

United Kingdom claims U.S. LLC is a tax haven company

United Kingdom is beating America as the better business country

With the exit from the European Union, Britain has been able to have its own tax policy.  The U.K. plans to reduce its corporate tax rate from 20% to 17%.   Unlike the U.S., the U.K. does not have a state income tax.  

E-commerce and other cloud-based business have a special tax planning advantage by being in the U.K.   The U.K.’s income tax treaties with Western Europe  and the United States will remain even after the British Exit

Hosting your  Ecommerce business on a computer server in the U.K. can avoid income taxes in Western Europe.

The key is to keep your inventory in the U.K. or to sale web based intangible assets.

For example, if your site is a similar to Travelocity, the site is providing a service (similar to a travel agent).  Service income is sourced where the service provider (you computer server) is located at the time the service is provide.

The same result applies if you are selling a product like an E-book, a video or music or providing a big data service.

In many cases, your U.K. corporation will avoid both  U.S. income taxes and state income taxes.

Here is the best business and tax structure for an Ameican doing business in the United Kingdom.

The first goal of a business structure is to protect the owner’s assets.  At the end of the 1800s, corporations were invented.   Corporations exist only because a government allows them.  Capitalist need corporations to take a limited amount of risk.

The problem for Americans is that we are starting to use limited liability companies.   U.K. courts may not accept an American LLC as an entity that protects the LLC’s owner from the LLC’s debts.

Thus, a corporation is my favorite choice for doing business in the U.K.  If you use an American corporation, you have a choice of being taxed under two different parts of the U.S. tax laws.

In the U.K., you have no choice.  The corporation pays the U.K. tax.  For tax planning, I prefer the U.S. corporation to open a branch in the U.K.

A U.K. Branch allows for large tax saving because of the “foreign tax credit” and the U.K. Tax Treaty.

Your U.S. income tax is reduced by the income tax paid by the corporation to the United Kingdom.  In effect, you get a full refund for the foreign income taxes.

Another choice is to create a U.K. corporation.   The advantage is a deferral of U.S. income taxes on your foreign (U.K. or EU) profits.     However, there is a tax cost.  You will not be allowed the foreign tax credit for the foreign income taxes paid by the U.K. company. `

The other issue of a U.K. company is the cost of filing an IRS information return.  This return is Form 5471.  The Form is complicated because of the many tax saving elections that you can make.    While the cost of this return is about $5,000, the tax savings are in the $10,000s of thousands.

Here is some  more information on international tax law for the American small business.

If you need help in deciding which business entity is best or in preparing the Form 5471, then please, contact me, Brian Dooley, CPA, MBT at [email protected] 

Court lets American living in Virgin Islands to Avoid U.S. Taxes

Arthur I. Appleton, Jr. loves living the Caribbean life.   He started a small business in the U.S. Virgin Islands.   The local government gave him a tremendous tax break.   For a local business, the USVI government gives you a tax haven status. 

St_John_Usvi_ TAX_HAVEN

The Virgin Islands is a separate income tax country.   Its tax laws were written by the Navy at the beginning of last century.     The law is simple.  An American living in the Virgin Islands is not subject to U.S. taxes.

International tax planners have used the U.S.V.I. to legally avoid taxes since the 1970’s.

During 2002, 2003, and 2004 Arthur timely filed Form 1040, U.S.  Individual Income Tax Return, for each year as a territorial tax return with the U.S. Virgin Islands Bureau of Internal Revenue (VIBIR) under IRC Section 932(c) (2).

Arthur did not file a Federal tax return for 2002, 2003, or 2004 or pay income tax to the Internal Revenue Service.   More than three years after Arthur filed his tax returns, the IRS mailed Arthur a notice of deficiency determining income tax deficiencies and penalties for 2002, 2003, and 2004.

The IRS asserted to the Tax Court that because the U.S.  Virgin Islands is a separate taxing jurisdiction, the Forms 1040 Arthur filed  with the VIBIR are not properly filed Federal tax returns; and because  Arthur’s Federal tax filing obligations were unmet. The IRS claimed that the three-year period of limitations never started.  They claimed that Arthur owed U.S. taxes on income not taxed in the USVI.

Arthur told the IRS that they need to read the law and that filing his return with the Virgin Islands started the three-year statute of limitation. Arthur stated that the Forms 1040 filed with the VIBIR met his  Federal tax filing obligations and commenced period of limitations because they were “returns” as defined by Beard v. Commissioner, 82 T.C. 766 (1984), aff’d, 793 F.2d 139 (6th Cir. 1986), and they were filed with the VIBIR in the USVI as directed by the law.

Also, Arthur asserted a motion for summary judgment.  This means the Judge tosses the case out of the Court.   Arthur won.  He did not owe the IRS taxes, and the case was thrown out of Court.

In summary, the Court held that Forms 1040 Arthur filed with the U.S.V.I. for 2002, 2003, and 2004 met Arthur’s U.S.  tax filing obligations.  Further, the period of limitations commenced when Arthur filed his returns with the U.S.V.I.  and the period of limitations expired before The IRS’s mailing of the notice of deficiency.  

If you would like to brainstorm your tax planning, then please call me, Brian Dooley CPA, at 949-939-3414 for a free one hour consultation.

Here is the link to the case.