# Owing US tax on UK dividends



## stardav (Dec 10, 2016)

Hi,

I am a dual US/UK citizen, living in the UK, now the director and sole shareholder of a UK Limited Company. Most of my income is dividends from the UK Ltd Co and I am struggling with the "maximum amount of credit" for passive category income, on line 21 of IRS Form 1116 ("Foreign Tax Credit"). It comes from the adjustment to qualified dividends, applied at lines 1a and 18 on Form 1116. So despite having paid $27,359 in UK tax for these dividends, line 21 sets a maximum credit of $4,070 for this income. I end up owing about $6,000 US tax on these dividends. Having already paid significant tax to the UK on this income, it seems to me a violation of the US/UK DTA to now also pay tax to the US.

What is the remedy? Is Form 1116 in violation of the US/UK DTA here? If so, how does one go about applying the DTA when it conflicts with the Instructions for Form 1116?

Or am I stuck with that US liability? In that case, can I get Foreign Tax Credit Relief from my UK tax return? Unfortunately my UK tax preparer is pretty helpless there, and when I study the UK form myself, it's not clear how to document the foreign tax on UK income. (I could only find where to record foreign tax on _foreign_ income, but that's not what this is, is it?)

Thanks for any concrete advice. I've studied all the forms and pubs and treaties but I haven't found the answers I'm looking for.

Best wishes to all!


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## stardav (Dec 10, 2016)

I just found something relevant on page 45 of the Technical Explanation. (Thanks iota2014 for the link to this, I can't post it myself as I'm a newbie here.) It says:



> Notwithstanding the foregoing limitations on source country taxation of dividends, the saving clause of paragraph 4 of Article 1 (General Scope) permits the United States to tax dividends received by its residents and citizens, subject to the special foreign tax credit rules of paragraph 6 of Article 24 (Relief from Double Taxation), as if the Convention had not come into effect.


So it sounds like the US tax liability on UK dividends is genuine, and I should seek relief somehow. So now the question is: was the maximum credit of $4,070 on line 21 of Form 116 the limit of my "Relief from Double Taxation"? Or can I still seek relief from the UK for $6,000 of US tax I had to pay on UK dividends?

Thanks all!


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## iota2014 (Jul 30, 2015)

stardav said:


> So it sounds like the US tax liability on UK dividends is genuine, and I should seek relief somehow. So now the question is: was the maximum credit of $4,070 on line 21 of Form 116 the limit of my "Relief from Double Taxation"? Or can I still seek relief from the UK for $6,000 of US tax I had to pay on UK dividends?


As it's UK-source income, the UK has primary taxing rights so you can't claim relief from the UK.

But perhaps Bev or another poster will be able to suggest a way to reduce the US tax due.


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## Bevdeforges (Nov 16, 2007)

Unfortunately, I'm only just starting to "engage with" the details of Form 1116 and the Foreign Tax Credit. Assuming that you have correctly calculated the maximum credit you're entitled to, you may very well owe the extra tax to the US. 

It's pretty much impossible to claim any sort of tax credit on this from the UK, given that the qualified dividend is UK sourced and, as iota has said, the UK is the primary taxing authority. There's also the little matter of filing the necessary additional forms for being director and sole shareholder of a UK limited company. (Form 5471, I think it is.)

You could try contacting the US Taxpayer Advocate (unfortunately you can only do this after you pay the tax to the IRS) and see if they can give you any advice or explanation.
Cheers,
Bev


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## Moulard (Feb 3, 2017)

If you are not sure that you have calculated values for the 1116 there is a worked examples out there on the internet. 

Search for "Form 1116 comprehensive example" It covers a scenario with both Passive and General Tax credits.

Publication 514 used to include it, but it appears that this is no longer the case.

A trick... build a couple excel formulas, using that worked example, to ensure you got all the calculations correct, and then swapped out the example numbers for your numbers.


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## iota2014 (Jul 30, 2015)

stardav said:


> Hi,
> 
> I am a dual US/UK citizen, living in the UK, now the director and sole shareholder of a UK Limited Company. Most of my income is dividends from the UK Ltd Co and I am struggling with the "maximum amount of credit" for passive category income, on line 21 of IRS Form 1116 ("Foreign Tax Credit"). It comes from the adjustment to qualified dividends, applied at lines 1a and 18 on Form 1116. So despite having paid $27,359 in UK tax for these dividends, line 21 sets a maximum credit of $4,070 for this income. I end up owing about $6,000 US tax on these dividends. Having already paid significant tax to the UK on this income, it seems to me a violation of the US/UK DTA to now also pay tax to the US.
> 
> ...


I'm not an expert of any kind, but I would have thought that if your UK tax preparer doesn't understand when you can / cannot claim UK tax relief, they really shouldn't be charging a fee to prepare the UK tax return of a dual US/UK citizen with significant passive income. It might be safer, not to mention cheaper, to do both returns yourself, or if that's not possible, look for a different advisor. You shouldn't have to pay an advisor *and* do the work yourself.


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## liquiduty (Oct 23, 2010)

I think what you should have done (and can perhaps still do) is to apply for foreign disregarded entity status for your UK limited company. This means that in the eyes of the IRS your company's income is your income and you can take the foreign earned income exclusion on your company's earnings. The dividend you take in the UK isn't treated as a dividend by the IRS but as earned income.

In theory if you don't apply for foreign disregarded entity status your UK Limited company should be filing a US corporate tax return as a foreign corporation - this is a bit of a palaver.

Have a read of http://www.expatforum.com/expats/expat-tax/641993-us-taxes-uk-limited-company-us-citizen.html


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## santafe (Sep 10, 2012)

quick question are these dividends from before April 2016 when HMRC still gave a 10% dividend credit; you may owe tax if the UK personal tax dividend tax rate is lower than the US would be. I would assume you would pay 15% in the USA on qualified divs and get a credit for that from the 1116. AMT may catch you if your income is high.


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## santafe (Sep 10, 2012)

do you have other income on your tax return? is your tax liability definitely due to passive dividend income; you can only use uk tax paid on passive income to credit USA passive income, so you may have a liability due to other items on your tax return.


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## Moulard (Feb 3, 2017)

It may be worth looking very carefully at any foreign tax credit rules in the UK.

In Australia at least there is a tiny window where one can take a Foreign Tax Offset (what we call a foreign tax credit) for Australian sourced income that has been taxed internationally. 

You may have something similar.


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## iota2014 (Jul 30, 2015)

Moulard said:


> It may be worth looking very carefully at any foreign tax credit rules in the UK.
> 
> In Australia at least there is a tiny window where one can take a Foreign Tax Offset (what we call a foreign tax credit) for Australian sourced income that has been taxed internationally.
> 
> You may have something similar.


I trust that is not the case. That would be very unfair to non-USC UK-resident taxpayers.


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## Moulard (Feb 3, 2017)

Low and behold the UK does allow foreign tax credits...

https://www.gov.uk/tax-foreign-income/taxed-twice

Remember the primary purpose of double taxation treaties and tax credits are to minimize double taxation.

The laws of most countries do tax you on your global income when you are a resident of that country. It is on that basis that there is generally an offset for the non-residency based taxation.

Whether the relevant Act supports this situation would require time for digging I don't have at the moment.


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## iota2014 (Jul 30, 2015)

The UK gives foreign tax credits for tax paid on foreign income, in specified circumstances. It would be irrational, and probably illegal, for HMRC to refund tax paid by a UK-resident UK taxpayer on UK source income, in order to allow the taxpayer to pay the money to the IRS instead.

US-UK bilateral tax treaties don't exist to protect US expats from US taxation. The Saving Clause exists precisely to make sure USCs can't use the treaty for that purpose, except in a handful of carefully circumscribed scenarios as listed in 1.5.


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## Moulard (Feb 3, 2017)

This isn't about the treaty. It is about UK Tax law which allows someone to claim Foreign Tax Credit Relief if a double taxation agreement allows both countries to tax the same item of income. My very limited understanding of UK tax law allows some to claim either (whichever is smaller):

the foreign tax paid (or allowed by treaty)
the UK tax due

It is possible the UK tax law allows this only for foreign source income. It may not. I don't know. You would probably have to do a deep dive into the Income Tax Act to validate one way or another. 

The few Income tax acts I have read in detail, are typically written without consideration of the US Citizen based taxation and the savings clauses they mandate in the treaties. If you can, consider it a loophole in law drafting caused by a failure to consider foreign taxation on UK sourced income. Entirely reasonable given that is basically just two countries. The US and Eritrea, but I gather a few more are looking to introduce it too.

Yes. US CBT is an anathema. Yes. It has potential to erode foreign tax bases.

If I was facing a sizable US tax bill due to CBT, I know I would be looking at all options to reduce or mitigate it. I am just saying that poorly drafted legislation may come in handy is all.

And yes, Renunciation is the perfect mitigation strategy


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## iota2014 (Jul 30, 2015)

Moulard said:


> This isn't about the treaty. It is about UK Tax law which allows someone to claim Foreign Tax Credit Relief if a double taxation agreement allows both countries to tax the same item of income.


The point of a bilateral tax treaty is to allow the two "Contracting States" to resolve the conflict by agreeing which State will have primary taxing rights over various kinds of (usually cross-border) income. It gets confusing for US citizen expats, because the US denies them the right to exercise most of the treaty benefits that are available to non-US-citizens.

In the OP's case, the income in question comes from UK dividends and the OP is a UK resident, therefore the UK has sole taxing rights and does not concede its rights under the treaty; consequently the OP does owe the tax to the UK and has no basis under the treaty for claiming relief from the UK.

Quite separately, the treaty allows the US to tax its citizens "as if the treaty had never come into effect", and the US in theory does so, demanding that the OP pay US tax on the UK income which has already been taxed by the UK. The US has complicated rules about the extent to which it will allow credit for tax already paid. Once those rules have been applied, the OP is left owing the difference to the IRS. It's not fair, and is difficult if not impossible for the IRS to enforce, but there it is



> Yes. US CBT is an anathema. Yes. It has potential to erode foreign tax bases.
> 
> If I was facing a sizable US tax bill due to CBT, I know I would be looking at all options to reduce or mitigate it. I am just saying that poorly drafted legislation may come in handy is all.
> 
> And yes, Renunciation is the perfect mitigation strategy


Renounce, ignore, or (to chosen degree) comply: up to each person to decide which option works best for them.


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## Bevdeforges (Nov 16, 2007)

Iota already said it, but I also take issue with the statement:



> Renunciation is the perfect mitigation strategy


Renunciation has implications beyond just getting out of the CBT obligation. Especially in the current climate back in the Old Country, and especially if you have any assets or entitlements (like US Social Security) that you would prefer not to lose or have impaired (as by the 30% withholding tax on all proceeds paid to overseas non-citizens).

It's an option, and it works for some. But the "benefits" will vary with individual circumstances.
Cheers,
Bev


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## iota2014 (Jul 30, 2015)

iota2014 said:


> In the OP's case, the income in question comes from UK dividends and the OP is a UK resident, therefore the UK has sole taxing rights and does not concede its rights under the treaty; consequently the OP does owe the tax to the UK and has no basis under the treaty for claiming relief from the UK.


This is confirmed explicitly in Article 24.6.a:


> 6. Where the United States taxes, in accordance with paragraph 4 of Article 1 (General Scope) of this Convention, a United States citizen, or a former United States citizen or long-term resident, who is a resident of the United Kingdom:
> (a) the United Kingdom shall not be bound to give credit to such resident for United States tax on profits, income or chargeable gains from sources outside the United States as determined under the laws of the United Kingdom;


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## Moulard (Feb 3, 2017)

Bevdeforges said:


> Iota already said it, but I also take issue with the statement:


Sorry, there is no easy way to emote sarcasm. 
I was not actually recommending renunciation as a cure.


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