Incredulum wrote:I'm getting well beyond my US tax knowledge. Some thoughts best taken with a pinch of salt:
If being a sole trader solves the US problems but you are uncomfortable with being a sole trader from a liability point of view, then what about a UK LLP. If you've no wife to make a 0.01% partner, then you could incorporate a company which could be your 0.01% partner. Presumably that would be transparent from a US perspective.
Alternatively, as transparency appears to be your requirement, can you check the box on a UK limited company in order to make it transparent from a US perspective? I know they're planning on changing the rules, but it might be years.
Alternatively again (and now I'm guessing) what if your UK company makes no profit by paying you a salary of all its profit? Does that get you out of Subpart F?
Finally, do you ever intend to return to the US? If not, then perhaps you can abandon your US domicile.
These are all logical suggestions and I've analyzed most of them recently. I don't think any of them work. My understanding is as follows (apologies for the non-specific/overview nature of what I state below - its very, very complicated):
Losing my US domicile happens if/when I have to take UK domicile. It's irrelevant as US Citizens are taxed on a worldwide arising basis forever irrespective of their domicile. Abandoning USA Citizenship probably isn't possible as I'd lose my state pension (which I will get from USA and not from UK). (There are other USA rules discouraging doing that as well.)
- Setting up an LLC/LLP in either USA or UK and operating from UK. The other country regards the foreign LLC/LLP as a CFC and taxes it as a corporation. Even if "check the box" is available (to be taxed as an individual) the double tax treaty US/UK and the foreign tax credit rules don't work properly. What usually applies ---> "Individuals/LLC/LLP's are regarded as Corporations", "Foreign income/dividend tax is not creditable against corporation tax" etc. "FTC's are only available to corporations (not people, not LLC/LLP's etc.)", "as a CFC you're regarded as a Corporation even if you're an individual with salary".
- There was a recent UK case that relates to this (Swift vs HMRC). HMRC lost the case - but then stated on their website "we are ignoring this case and will tax as before in similar circumstances". That case was about a USA LLC/UK Partnership - and wanting to tax one persons salary as income in one country and as corporate profits in another (which means double tax as the DTT doesn't offset income tax against corporation tax paid overseas). The HMRC and IRS should take a good look at this case and change their rules IMO.
- These rules seem to have been set to avoid tax abuse in tax havens - and are over-complex for the legitimate, small business needing to appeal to double tax treaties. In particular, DTTs covering two high-tax regimes like the USA and UK. The CFC rules kill small-business startups by legitimate individuals/companies who are USA and UK citizens needing to live/operate from in UK long-term.
Scenarios I have run show my worldwide tax rates in the 55-85% range if I'm not incorporated in BOTH UK and USA. (that's TOTAL taxes on every dollar profit - not incremental rates). And probably another significant % paid to accountants, lawyers and tax-preparers because of 2 corporations being setup in 2 countries and their "intersection" to avoid double tax.
Seems to me like the dual resident corporation idea (see my OP) or my new sole proprietor idea (mentioned above, and perhaps preferable) may be the only logical solution for a 1-man company intending to grow from the ground up. But personal liability is then a problem. Would welcome thoughts from others with opinions on these matters.
