SA - Tax on foreign income - confused

BlueC

Hi folks, I hope someone can offer some advice here.

I am a partner in a LLC in the US and I don't understand whether my UK SA tax return should be based on my percentage of the gross profit of the company during the year, or only on the amount of money I actually received from the company during the year (it is "income" tax, right?).

As an example, here is my tax situation for 2006 with made-up numbers for ease of understanding:

• I own 40% of the company.
• The company made a gross profit of $100,000.
• From a US tax point of view, I am liable to pay 15% tax on my percentage ownership of the company's gross profit - regardless of how much money I actually received from the company.
• Therefore I paid 15% of 40% of $100,000 (15% of $40,000 = $6,000) to the IRS in the US.
• I understand that due to the double-tax treaty with the US, any tax paid over there is offset against my UK income tax liability.
• I actually received only $20,000 as income from the company during the year.

Thus, from a UK income tax point of view, should I be declaring $40,000 as my taxable income from the company, or $20,000 as my taxable income from the company?

I appreciate your help.
Chris

Elaine_Wilson

I have no idea about US taxation but as no one else has answered thought I would pop in with what I do know.

If a company is in the UK your income would be either salary or investment income (dividend). A partnership share would be self employed earnings. Whether you disclose the full amount earned or just the remitted amount depends upon the type of income and also your residence status.

I assume you are resident in the UK, but are you also "ordinarily resident" and domiciled here? Have you read booklet IR20 which might just answer your question? This is downloadable as a pdf file from the HMRC website.

Sorry I can't be more help.

BlueC

Hi Elaine, thanks for responding.

Yes, I am a UK resident and ordinarily resident and domiciled here. I am British, in fact

I will take a look at IR20, so thanks for that. I have already looked through heaps of stuff on the HMRC website but none of it seems to be written in clear english that is easy to understand for the average non-accountant!

More suggestions are welcome!

System

Blue C if you can't get an answer here can I suggest you make an appointment at your local HMRC enquiry centre and specify that you need to speak to a technical advisor as it is unlikely that the staff will be able to help you. This is more complicated than the queries they would normally deal with. Other than that all I can suggest is a visit to an accountant.

Cook_County

An LLC is a look through entity for US tax purposes. As a non-resident alien you would have had US tax withheld on your underlying 40% share of the LLC. You may also have to file a US return if there was not sufficient withholding. The rate of tax applicable for US purposes will depend on the kind of income the LLC generates (eg rental income, dividend income, interest income etc etc).

From a UK perspective HMRC take the view that an LLC is a seperate opaque entity- it is not a partnership, but considered as a company. Therefore you have received distributions from a company and you pay UK tax on the distributions (not the underlying income) as if you had received foreign dividends. This means that you pay US tax on your underlying share of the results plus UK tax again on distributions.

This kind of structure is not appropriate for UK income tax purposes (although it is helpful for example for US estate tax purposes).

I am assuming in this answer that this LLC is not managed & controlled in the UK (the other 60% is owned by non-UK persons who control the LLC).

Why are you in this structure, just curious?