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10 | International taxation
A non-domiciled UK resident is liable to The following sets out a comparison of the instances. US persons must ensure that
income tax and CGT on all UK source UK and US taxation of certain investment they have full professional advice as to
income and gains although he can, per tax types: their tax filing obligations to protect their
year, elect to be taxed on the remittance basis position.
so that he is only liable to UK tax on overseas 1. Interest on cash and cash
income/gains which are actually remitted the equivalents 2. Equities
UK (although a non-domiciled individual 1.1 UK treatment 2.1 UK treatment
who has been UK resident for seven out of Interest that is generated from cash Company dividends are subject to income
the previous nine tax years must now pay an holdings is income for UK tax purposes tax for UK purposes. The higher rate of
annual UK tax charge of £30,000 to claim the and is subject to income tax. In some UK income tax on individuals in respect of
remittance basis). It should be noted that instances, cash is held in cash funds which dividends is presently 32.5% (although
there are UK offshore anti-avoidance could sometimes constitute an offshore this will rise to 42.5% from 6 April 2010
provisions that look to assess income and fund for UK purposes (see section 4 for those with annual earnings in excess of
gains in offshore structures (e.g. non-UK below). £150,000).
trusts and offshore companies) to UK tax in 1.2 US treatment The proceeds of the sale of shares or the
the hands of beneficiaries/beneficial owners Interest on cash holdings will normally be liquidation of a company are generally
but these only apply to individuals who are subject to US income tax at ‘ordinary subject to CGT. In contrast to the high
UK resident for tax purposes. income rates’. Persons subject to the US rates of income tax, the UK now has a flat
Residency is, accordingly, the crucial factor income tax regime also need to be aware rate of CGT of 18%.
for UK tax exposure. The US, by contrast, of the possibility of being taxed on It should be noted that shares in any non-
looks to tax the worldwide income and exchange rate gains. Typical examples UK company (including LLCs) that do not
capital gains of all US citizens, ‘permanent would include a US citizen or green card comprise a single position (i.e. are not a
residents of the US’ (so-called ‘green card’ holder holding Sterling offshore for UK direct company holding) can constitute an
holders) and persons tax resident in the US. remittance tax purposes and converting offshore fund for UK rules (considered at
This tax applies to citizens and green card such amounts back into dollars at section 4 below). In addition, certain
holders regardless of where in the world they favourable rates as well as paying off types of entities, such as single members
may live.
1
Further, non-US persons resident Sterling denominated mortgages at LLCs, will be transparent for US tax but
in the US, e.g. employees on secondment, are favourable rates. opaque for UK tax purposes.
frequently unaware of the US worldwide tax Generally, it should be noted that US 2.2 US treatment
net and tend not to adjust their investment persons are required to report a number of While dividends have historically been
portfolios for US tax issues prior to moving financial arrangements to the US Internal taxed as ordinary income, certain
there. As the US has an extensive set of Revenue Service (‘IRS’) whether or not ‘qualified dividends’ are currently being
‘offshore’ anti-avoidance rules which often those US persons have any US tax taxed at favourable capital gains rates.
adversely impact many categories of non-US exposure. As an example, a US person This applies to dividends from US
investments, a failure to enquire into the tax who has an interest in, or signature (or companies and certain qualified non-US
characterization of non-US investments for other) authority over, one or more foreign companies. Dividends from non-US
persons subject to the worldwide US tax net financial accounts, must, if the aggregate companies eligible for income tax treaty
can result in seriously adverse tax value of all relevant accounts exceeds protection under a treaty with sufficient
consequences. US$10,000 at any time in the calendar information exchange provisions should
US federal tax generally applies to ordinary year, file a Form TD F 90-22.1, commonly be treated as favourable qualified
income at marginal rates of up to 35% and referred to as a foreign bank account dividends. This treatment is scheduled to
gains on assets held for more than one year at reporting form, or ‘FBAR’. The penalties expire December 31, 2010 at which time
15%. However, where various offshore anti- that can apply where there has been a ordinary income tax rates will apply.
deferral rules apply, adverse results can failure to make an FBAR return can be Accordingly, US taxpayers receiving
quickly follow. Two of the offshore anti- significant. FBAR reporting obligations dividends who are also subject to UK tax
deferral rules apply to investments through apply to a broad range of accounts and on such dividends may find themselves
trusts and/or holding company structures and investments including foreign bank with larger than expected tax bills.
one applies based on whether the investment accounts and any non-US securities or Gains on sales of equities investments
itself may be adversely classified. One brokerage accounts. Current guidance (whether US or not) will be taxed at 15%
example is when gains in investments which provides that interests in individually where they are held for more than 12
are adversely classified are taxed at the highest owned stocks and bonds are not subject to months or at ordinary income rates if
ordinary income tax rate and suffer an reporting under the FBAR. It further held for 12 months or less. Accordingly,
additional interest charge being compounded provides that the ownership of shares in a for US tax purposes, longer retention of
over the duration of the holding period. mutual fund does constitute a financial investments can improve their tax
Some (few) investors may take comfort in account under the FBAR rules. Informally treatment. With the abolition of CGT
knowing that these tax and interest charges the IRS has indicated that non-US private taper relief in the UK, the rates of UK tax
cannot exceed the amount of the gain; (most) equity and/or hedge fund interests likewise on investments are not generally affected
other investors will prefer to avoid the may constitute ‘financial accounts’ for by the duration of the period of
application of these rules.
2
purposes of the FBAR rules in some ownership other than in relation to the
1
Under income tax treaties that the US has with certain jurisdictions it may be possible for green card holders to eliminate worldwide tax by
claiming treaty relief, though such a claim should be carefully evaluated as it could result in ‘expatriation’ for US tax purposes which itself
could have an adverse tax impact.
2
In addition to US federal income and gains tax, most states (and some cities and municipalities) also tax income and/or gains of resident
persons.
September 2009 Investment International www.investmentinternational.com
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