# Dividends and FEIE - Ltd Company in the UK



## hackneycentral

Hello,

I've been digging through posts from the last few years and first, many thanks to everyone who has contributed such valuable advice. It's given me a running start on a handful of otherwise complex and Byzantine topics.

From my research, I've made a few assumptions that I plan to follow when filing my 1040. I'd be interested to know if my assumptions are broadly in line with others interpretations (and I accept interpretations will differ!).

I am the Director of a private Limited Company in the UK; I have 100% sole ownership. I pay myself a base salary and withdraw the rest in dividends. The company is one year old; before then I was salaried to an employer. In previous years, I took the foreign-earned income exclusion and always fell below the threshold.

My assumptions for this tax year are:


A private limited company with holdings under the 200k (the threshold for FATCA reporting) is not considered a corporation, following the interpretation of "certain" companies in form 8832 — despite 100% sole ownership. If the private limited company is not considered a corporation, I am not required to file 5471.
If the private limited company is not considered a corporation, it is *not* to my advantage to "check the box" on 8832 to register as a disregarded entity.
Dividends are "unearned income" and not eligible for FEIE. Corporation tax is not equal to an income tax.

It would follow then that when filing my 1040, my base salary and other earned income (e.g. income as a sole trader, PAYE) qualify for the FEIE; and that dividends are reported as normal and taxed at the low US tax rate.

Thoughts?

Cheers


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## Bevdeforges

The first thing to understand is that there is no one right or wrong answer to any specific tax question. What you have done is to outline a viable "tax position" for your circumstances, and frankly, it sounds reasonable to me. File your US taxes that way and if there are questions or problems, they'll get back to you.

Keep a copy of your assumptions with the copy you keep of what you file this year so that you can refer to it should any questions be raised. Chances are, you'll hear nothing.
Cheers,
Bev


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## liquiduty

I'm hardly a tax expert but...

Can you expand on how you have come to the conclusion that a foreign limited company with holdings under 200K (presumably USD) is not considered a corporation in the eyes of the IRS?

I also don't understand the link with FATCA which I thought was simply a reporting requirement on foreign accounts.


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## Bevdeforges

Take a look at the instructions for form 8832. At the end of the instructions, there is a listing of "Foreign Entities Classified as Corporations for Federal Tax Purposes." If a business is registered as something other than the ones included on this list, it could be argued that the IRS does not consider it a "corporation" and so not subject to the various reporting for "certain foreign corporations."
Cheers,
Bev


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## liquiduty

The logic I'm having trouble with is that the list at the back of 8832 defines what the IRS definitely sees as a corporation. But it's not meant to be an exhaustive list though? Or is it?

Just because a company is of a different type - how does that mean it's not a corporation in the eyes of the IRS until some part of the IRS code is actively exercised or implemented? 8832 does give a mechanism for a corporation to be treated as a disregarded entity but the OP hasn't used that - he's simply taken his own selective interpretation which seems dangerous?


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## BBCWatcher

hackneycentral said:


> I am the Director of a private Limited Company in the UK....





Bevdeforges said:


> Take a look at the instructions for form 8832. At the end of the instructions, there is a listing of "Foreign Entities Classified as Corporations for Federal Tax Purposes."


OK, let's look....



IRS Form 8832 said:


> United Kingdom—Public Limited Company


Hackneycentral has a U.K. Private Limited Company, and IRS Form 8832 says a U.K. Public Limited Company is a foreign entity classified as a corporation for U.S. federal tax purposes. IRS Form 8832 does not say that a U.K. Private Limited Company is not a corporation. Indeed, Form 8832 includes a "Caution!" just below that list and a reference to the tax code (26 CFR 301.7701-2).

But let's assume Hackneycentral's U.K. Private Limited Company is not a corporation for these purposes, and I think that's a reasonable assumption. Then what is it? Fortunately the IRS has an answer and, would you believe, it's in the immediate following section of the tax code: 26 CFR 301.7701-3. (How convenient!) Let's take a look at that....



U.S. Tax Code said:


> § 301.7701-3 Classification of certain business entities.
> (a) In general. A business entity that is not classified as a corporation under § 301.7701-2(b) (1), (3), (4), (5), (6), (7), or (8) (an eligible entity) can elect its classification for federal tax purposes as provided in this section....An eligible entity with a single owner can elect to be classified as an association or to be disregarded as an entity separate from its owner. Paragraph (b) of this section provides a default classification for an eligible entity that does not make an election....
> (b) Classification of eligible entities that do not file an election
> ....
> (2) Foreign eligible entities
> (i) In general. Except as provided in paragraph (b)(3) of this section, unless the entity elects otherwise, a foreign eligible entity is—
> ....
> (B) An association if all members have limited liability; or
> (C) Disregarded as an entity separate from its owner if it has a single owner that does not have limited liability.
> (ii) Definition of limited liability. For purposes of paragraph (b)(2)(i) of this section, a member of a foreign eligible entity has limited liability if the member has no personal liability for the debts of or claims against the entity by reason of being a member. This determination is based solely on the statute or law pursuant to which the entity is organized, except that if the underlying statute or law allows the entity to specify in its organizational documents whether the members will have limited liability, the organizational documents may also be relevant. For purposes of this section, a member has personal liability if the creditors of the entity may seek satisfaction of all or any portion of the debts or claims against the entity from the member as such. A member has personal liability for purposes of this paragraph even if the member makes an agreement under which another person (whether or not a member of the entity) assumes such liability or agrees to indemnify that member for any such liability.


So there you go. Hackneycentral's U.K. Private Limited Company (single owner) defaults to either (an association) or (disregarded as an entity separate from its owner) depending on Hackneycentral's liability. Hackneycentral has the option to file Form 8832 to switch from this default to the other status (with possible implications for late election, per normal). But there are only two options according to the tax code, and one will be default according to the facts.

There's much more in 26 CFR 301.7701-3, but that's the starting point.

So, Hackneycentral, do you prefer filing as an association or as a disregarded entity? Those appear to be your two choices with one as default.


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## BBCWatcher

To elaborate slightly, your choices are "association taxable as a corporation" (as IRS Form 8832 Part I Line 6 checkbox d) or disregarded (as Line 6 checkbox f). The IRS summarizes the relevant tax code for you on this page if you'd like the shorter version.


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## liquiduty

BBCWatcher, thanks for your posts. It's hard to be sure but it seems like the OP has not filed form 8832.

The OP also states that he/she is the sole owner of a UK limited company but then also describes himself as a sole trader - seems like it's one or the other but that it can't be both.

My opinion is that the OP is on thin ice by making a choice that would appear to suit him but not getting the IRS' acceptance by filing Form 8832. This might work for a while but the IRS might eventually come knocking asking about this Ltd company and where its tax returns are? Or have I missed something?


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## Dunedin

*More questions*

I would like to add two questions in relation to the US taxation of the income of hackneycentral’s company. These relate to his taxation if, as the analysis suggests is possible, he were to opt to be taxed in the US on the income of his UK company.

*Credit for UK corporation tax*
Would hackneycentral be able to make a claim for the UK corporation tax against his US personal tax liability?

By way of illustration, suppose that the company’s income were £100k, with UK corporation tax of £20k. Would the US allow a credit for the £20k against US personal tax?

*Credit for UK income tax*Hackneycentral might have a liability for UK income tax if his dividends were sufficiently high. Would this tax be available for credit against US income tax?

On the same illustration, suppose that the company had paid £80k in dividends. The UK income tax liability on this might be say £15k. Would the US allow this tax to be set against the US personal liability?

*Commentary*
Both these questions relate to the mismatches that could arise. The first mismatch relates to corporate tax in the UK against income tax in the US. The second mismatch relates to a tax on dividend in the UK against tax on trading income in the US. On the first matter, there is a reference in Article 1(8) of the DTR to fiscally transparent entities. However its meaning and practical application to this situation are not clear. Further would this extend to tax charges on different types of income? Fairness would suggest that both types of UK liability would be available for offset, but is this actually the case?


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## Bevdeforges

The big question is: does the UK business entity pay its own taxes, or do the profits of the business flow through to the owner's personal tax return? If it pays its own taxes, then the only income reportable by the OP is the "salary" or dividends paid by the business to the owner.
Cheers,
Bev


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## BBCWatcher

There are only two choices here as far as I can tell: association taxed as corporation (IRS Form 1120, etc.) or disregarded, rolling that U.K. Private Limited Company into IRS Form 1040 Schedule C, etc. One of those two is default depending on the liability facts, and the other is available by filing IRS Form 8832.

That's it. There are no other options in the tax code in these circumstances.

As for which path is more tax favorable, "it depends." In the first case any U.K. tax on the PLC can be taken as a foreign tax credit (to the corporation) and the top tax rate is lower. In the latter case there's possible Foreign Earned Income Exclusion protection and also a personal Foreign Tax Credit (for any U.K. tax). IRS Form 1040 Schedule C (and other forms as applicable) is likely the simpler path from a filing point of view. And there may be treaty protections, though those protections would not eliminate filing responsibility either way. The treaty would potential just change some numbers, and then IRS Form 8833 would explain the treaty position.

So that's how it goes as far as I can tell. Hackneycentral can choose whichever of those two paths makes the best sense.


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