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.
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]