The US UK Tax Treaty – Will It Be Affected by Brexit?
The US UK tax treaty is a very important tool for preventing the double taxation of income. This is true in the case of individuals and businesses, and in the case of UK persons’ activities in the US or US persons’ activities in the UK.
With Brexit looming, some have asked whether the UK’s separation from the European Union will affect the scope or applicability of UK’s many international agreements. In this blog, we explore the potential effects that Brexit may have particularly on the US UK tax treaty.
The US UK Tax Treaty – Benefits for Individuals
For U.S. expats in the UK (or UK expats in the US), the US UK tax treaty offers, among other things, credits, deductions, exemptions and reductions in the rate of income taxes in order to prevent the double taxation of income both in the United States and the United Kingdom. Resourcing of income is also a major beneficial feature of the treaty.
In most cases, utilization of the treaty for U.S. tax purposes needs to be disclosed to the IRS on a Form 8833, which is included in the federal income tax return. Failure to disclose a treaty-based return position may result in a penalty of $1,000 for an individual.
The US UK Tax Treaty – Benefits for Companies
For UK business looking to invest in the United States, multinational structuring (e.g., a UK parent company with a U.S. subsidiary operating company) can be greatly enhanced with careful utilization of the business-related provisions of the US UK tax treaty. As examples, the treaty lowers interest and dividend rates between related corporate entities to 0% and 5%, respectively.
As is the case with individuals, utilization of the treaty by business entities, such as a corporation, needs to be disclosed to the IRS on a Form 8833, which is included in the corporate income tax return. Failure to disclose a treaty-based return position may result in a penalty of $10,000 for a corporation.
While most of the provisions of the US UK tax treaty will seemingly not be affected by the UK’s separation from the EU, there is one article that will at least require the attention of treaty drafters – and that this is the so-called “limitation on benefits” (LOB) article. The LOB article contains rules for determining the eligibility of taxpayers to enjoy the benefits of a tax treaty. While individuals are generally eligible, companies must pass one of several tests that are designed to determine the economic substance of a corporate holding structure.
In the case of structures that utilize a non-US/UK company (e.g., investment vehicles in EU member states, such as Luxembourg or Ireland), the LOB article generally requires that a company claiming treaty benefits must meet certain ownership requirements. In the case of U.S. treaties with EU member countries, ownership by persons in other EU member states can often satisfy this requirement for the purposes of providing certain treaty benefits (referred to as “derivative benefits”). As such, when Brexit arrives and the UK is formally no longer a member of the European Union, company structures that rely on UK owners as members of the EU could lose the ability to claim treaty benefits.
What This Means for US Expats
Due to the political wrangling over Brexit, it remains to be seen exactly what the UK’s separation from the EU will ultimately look like. From a treaty perspective, when Brexit does arrive, the effects should be felt more in the corporate arena.
For this reason, business owners with cross-border structures should keep an ear out for the latest Brexit updates. This will help ensure that their businesses continue to operate in a tax effective manner.
By Joshua Ashman, CPA & Nathan Mintz,, Esq.