# US FTC on passive income



## mikemitche11 (Apr 9, 2019)

I am a US citizen but tax resident in the UK for almost two decades. I have savings in both the USA and the UK. I have to pay UK tax on all of my passive income, whether generated in the USA or the UK. The US Foreign Tax Credit appears to only offer me credit for the UK tax on the UK passive income (it refers to "foreign source income"). This doesn't seem right - surely I should get credit for the UK tax on the USA passive income as well, otherwise I am being double taxed on the USA based income. I wonder if the interpretation of "foreign source income" on form 1116 should be "foreign-taxed income"? Does anyone know how I get credit for that UK tax on my US income?


----------



## Bevdeforges (Nov 16, 2007)

I am no expert on the FTC - however, two suggestions here. First of all, do check the US-UK tax treaty. There are often all sorts of weird exceptions to the rules or to how you are supposed to treat these things.

Secondly, the FTC applies to foreign income taxes you pay on income you're declaring to the US. I don't think it's limited to "foreign taxes on foreign source income" (though this is the sort of thing that might be handled in the tax treaty). 

With any kind of luck, someone with more experience in these things should be along soon.


----------



## underation (Oct 25, 2018)

Generally, if you're a UK resident and you receive foreign income which has already been taxed by the foreign country (the US), report it on your UK return, claiming credit for the foreign tax paid.

But check the treaty, as Bevdeforges says, to make sure the type of income you are receiving is not an exception to the rule. 

Lots of info on HMRC's website, or ring them if in doubt.


----------



## jiminlondon (Apr 12, 2019)

*jiminlondon*

I'm not an expert on this, but basically you need to fill out a form 1116 selecting the income category "certain income re-sourced by treaty." Interest income from US sources can be re-sourced to the UK under the US-UK Tax Treaty. That will allow you to generate tax credits based on the UK taxes that you paid on that income.


----------



## mikemitche11 (Apr 9, 2019)

Thanks, re-sourcing to the UK sounds sensible.


----------



## underation (Oct 25, 2018)

You might want to check the treaty and the 1116 instructions first.



> *Certain Income Re-Sourced by Treaty*
> 
> If a sourcing rule in an applicable income tax treaty treats U.S. source income as foreign source, and you elect to apply the treaty, the income will be treated as foreign source.
> 
> Important. You must compute a separate foreign tax credit limitation for any income for which you claim benefits under a treaty, using a separate Form 1116 for each amount of re-sourced income from a treaty country. See sections 865(h), 904(d)(6), and 904(h) (10) and the regulations under those sections (including 1.904-5(m)(7)) for any grouping rules and exceptions. Add the amounts from line 22 of each separate Form 1116 and enter the total on line 28 of your summary Form 1116 (that is, the Form 1116 for which you are completing Part IV). In addition, you may be required to file Form 8833, Treaty-Based Return Position Disclosure Under Section 6114 or 7701(b), for the re-sourced income.


----------



## Moulard (Feb 3, 2017)

Resourcing by treaty occurs when there is a clause in the tax treaty which basically says.. in certain circumstances you can pretend that income generated in one country has been generated in the other country. Not all treaties have such clauses and they will typically read something like...

"Income, profits or gains derived by a resident of one of the Contracting States .... shall for the purposes of the law of that other State relating to its tax be deemed to be income from sources in that other State."

Unless you are specifically aware of such a clause that covers your specific type of income then chances are it isn't relevant and you would just use the general (wages), passive (interest, dividends etc) Form 1116.


----------



## underation (Oct 25, 2018)

Moulard said:


> Unless you are specifically aware of such a clause that covers your specific type of income then chances are it isn't relevant and you would just use the general (wages), passive (interest, dividends etc) Form 1116.


The OP can't use Form 1116 if there's no applicable re-sourcing provision in the treaty. 

If there's no applicable treaty provision _which can be claimed by a US citizen_, the US has primary taxing rights on US-source income paid to a UK-resident. 

The US taxes the US-source income, and the UK-resident taxpayer files a UK Self-Assessment return to report the foreign income and claim credit for the foreign tax paid.


----------



## underation (Oct 25, 2018)

underation said:


> If there's no applicable treaty provision _which can be claimed by a US citizen_, the US has primary taxing rights on US-source income paid to a UK-resident.


Or rather:

If there's no applicable treaty provision _which can be claimed by a US citizen_, the US has primary taxing rights on US-source passive income paid to a US citizen who is resident in the UK.


----------



## jiminlondon (Apr 12, 2019)

I believe the key part of the US/UK Tax Treaty in this regard is Article 24, Relief from Double Taxation, and paragraph 6d:

_d) for the exclusive purpose of relieving double taxation in the United States
under sub-paragraph c) of this paragraph, profits, income and chargeable gains referred
to in sub-paragraph b) of this paragraph shall be deemed to arise in the United Kingdom
to the extent necessary to avoid double taxation of such profits, income or chargeable
gains under sub-paragraph c) of this paragraph.​_
This specifically addresses profits, income, and chargeable gains arising in the U.S., which may be re-sourced to the UK in order to generate a U.S. tax credit and avoid double payment of taxes.


You can find the treaty other documents including the technical explanation, which is particularly useful in regards to dividends (for which the U.S. is allowed a 15% tax) on the IRS site. Apologies, I'm new here and so prohibited from including links in my messages, but it's easy to find.


----------



## Bevdeforges (Nov 16, 2007)

Jim, thank you for that reference to the treaty. I'll give you the link to the treaty on the UK site: https://www.gov.uk/government/publications/usa-tax-treaties

If you look up the tax treaties on the IRS site, you tend to get all the various versions, protocols and amendments separately. The "other" side of the treaty have a tendency to produce an integrated version that is (somewhat) easier to read.


----------



## underation (Oct 25, 2018)

> I believe the key part of the US/UK Tax Treaty in this regard is Article 24, Relief from Double Taxation, and paragraph 6d:
> 
> d) for the exclusive purpose of relieving double taxation in the United States
> under sub-paragraph c) of this paragraph, profits, income and chargeable gains referred
> ...


You have to read the whole article - not just pull out sub-paragraphs. If the treaty allowed US citizens to re-source "profits, income, and chargeable gains arising in the US", in order to avoid paying US tax on US-source income, CBT would be completely pointless.

If the OP believes s/he can successfully rely on Article 24 in order to claim credit from the US for tax paid to the US on the specific category of US-source income being received (rather than claiming credit from the UK), that's the OP's choice. Be interesting to hear the outcome.


----------



## Moulard (Feb 3, 2017)

underation said:


> If the OP believes s/he can successfully rely on Article 24 in order to claim credit from the US for tax paid to the US on the specific category of US-source income being received (rather than claiming credit from the UK), that's the OP's choice. Be interesting to hear the outcome.


Indeed. The point I was trying to hint at with my resourcing comment the other day, was that this was not likely to be right; that only in very specific and limited situations is income re-sourced by treaty. But most of my posts are rushed as they are limited in time between digesting the morning coffee and rushing out the door to catch the train to work.

As you rightly say, correct treatment is will be pay US tax on the US sourced income and then claim a tax credit for US taxes paid on the next UK return.


----------



## jiminlondon (Apr 12, 2019)

Moulard said:


> Indeed. The point I was trying to hint at with my resourcing comment the other day, was that this was not likely to be right; that only in very specific and limited situations is income re-sourced by treaty. But most of my posts are rushed as they are limited in time between digesting the morning coffee and rushing out the door to catch the train to work.
> 
> As you rightly say, correct treatment is will be pay US tax on the US sourced income and then claim a tax credit for US taxes paid on the next UK return.


I completely agree with suggestions that one should read the entire treaty and that individual lines or paragraphs can not be taken out of context. I am only trying to point toward parts of the treaty that seem relevant to the original query and to address that query in principle.

If the situation is as originally stated, "I am a US citizen but tax resident in the UK for almost two decades" and dependent on the Residence requirements of Article 4 of the treaty (I'm assuming that in treaty terms he is considered resident in the UK and not in the US) then I must respectfully disagree with the advice above. The UK will take priority on taxation and foreign tax credits have to be taken in the US against foreign (i.e. UK) taxes rather than in the UK (against US taxes.) Dividends are a key exception, as the US is allowed a maximum tax of 15% on US-sourced dividends. In that case, only UK taxes in excess of 15% can be taken as a credit against US taxes, and the US tax on dividends, up to 15%, would be taken as a credit on UK taxes.

I agree that the implementation of these rules is complicated and needs to take account of many factors, but the principle is clear: If a US citizen is considered resident in the UK by the terms of the treaty, then UK taxes take priority.


----------



## underation (Oct 25, 2018)

jiminlondon said:


> I completely agree with suggestions that one should read the entire treaty and that individual lines or paragraphs can not be taken out of context.


Most of the treaty is irrelevant for a US citizen who is resident in Britain, unless s/he is receiving income covered by one of the Articles mentioned in 1.5 as exceptions to the saving clause. The saving clause (1.4) allows the US to tax US citizens as if the treaty had never come into effect. A USC resident in the UK can file a US return to adjust US tax due, and, if need be, a UK Self Assessment return to adjust UK tax due.



> I'm assuming that in treaty terms [the OP] is considered resident in the UK and not in the US


US citizens are eternally tax-resident in the US. USCs who are resident in the UK are therefore tax-resident in both countries.



> ...the principle is clear: If a US citizen is considered resident in the UK by the terms of the treaty, then UK taxes take priority.


It's generally the source country that has primary taxing rights, unless the treaty states otherwise. Often, the source country and the residence country will be identical, and in that case, in the UK, UK tax will indeed take priority.


----------



## jiminlondon (Apr 12, 2019)

underation said:


> Most of the treaty is irrelevant for a US citizen who is resident in Britain, unless s/he is receiving income covered by one of the Articles mentioned in 1.5 as exceptions to the saving clause. The saving clause (1.4) allows the US to tax US citizens as if the treaty had never come into effect. A USC resident in the UK can file a US return to adjust US tax due, and, if need be, a UK Self Assessment return to adjust UK tax due.


Thank you *underation* for highlighting 1.5 of the treaty. Indeed, it is one of the exceptions in 1.5a, namely "the benefits...conferred by Article 24 (Relief From Double Taxation)", that gives the US citizen who is tax resident in the UK the right to re-sourcing income in the circumstances described. Article 24 (6) (d) gives the provisions for that re-sourcing.



underation said:


> US citizens are eternally tax-resident in the US. USCs who are resident in the UK are therefore tax-resident in both countries.


Indeed! Thankfully the tax treaty provides some relief against the double taxation that would otherwise arise.



underation said:


> It's generally the source country that has primary taxing rights, unless the treaty states otherwise. Often, the source country and the residence country will be identical, and in that case, in the UK, UK tax will indeed take priority.


Typically "source" countries exercise this through withholding taxes, as the US does on dividend payments to non-US persons. As the US levies a 15% withholding tax on dividends to non-US persons, they are also allowed by treaty to collect a maximum of tax of 15% on US source dividends to a US citizen who is tax resident in the UK. That makes the re-sourcing of dividend income more challenging, as the amount that can be re-source will depend on the individuals relative tax rates in the US and the UK.


----------



## underation (Oct 25, 2018)

jiminlondon said:


> Thank you *underation* for highlighting 1.5 of the treaty. Indeed, it is one of the exceptions in 1.5a, namely "the benefits...conferred by Article 24 (Relief From Double Taxation)", that gives the US citizen who is tax resident in the UK the right to re-sourcing income in the circumstances described. Article 24 (6) (d) gives the provisions for that re-sourcing.


I'll be interested in hearing the outcome if you try it on. 



> Thankfully the tax treaty provides some relief against the double taxation that would otherwise arise.


For some types of income. Not when the income in question is taxable by both countries purely as a result of the saving clause. But in practice this usually only happens with residence-country income, since the US has primary taxing rights on US-source income (unless the treaty states otherwise), and the residence country doesn't try to tax it.

The "Technical Explanation" includes commentary as to whether/how the various treaty benefits are or are not affected by saving clause.

In the example described by the OP, it's not clear how double taxation could occur, since credits against the US tax paid can be claimed from the residence country -- resulting in the OP paying tax on the item only to the US.



> Typically "source" countries exercise this through withholding taxes


Correct. And the USC receiving the income can file a 1040 to claim whatever deductions s/he can muster to adjust the tax actually paid. Or, if the USC thinks too much tax is being withheld, no doubt there's a form or three to be filed to try to get it reduced.


----------

