Controlled Foreign Corporations (CFCs)
Where the US tax rules have the biggest impact on entrepreneurs is if the US considers your interest in the UK company to be a Controlled Foreign Corporation, or CFC. There are three key ways a UK company can become a CFC, including:
1. If you have a controlling interest of the shares of the company, the UK company will be a CFC. This includes if you control the voting rights or if you control the value of the share capital.
Control means greater than 50%.
2. Where there are multiple material US shareholders, you may have to consider all their shares to calculate whether the company is controlled by Americans. This applies to US owners who own more than 10%, who together control the company. The company then becomes a CFC.
3.You need to calculate both the direct and indirect shareholding of a UK company to determine whether it is a CFC. This includes looking through ownership structures, such as partnerships and trusts, to figure out the US tax owners and their respective percentage interests to determine whether you have a CFC. Wholly owned subsidiaries of a CFC will also be CFCs due to the indirect ownership, and subject to the US tax rules and reporting.
What should you do next?
To meet your US tax obligations, you need to review your shareholdings and business groups each year to determine whether you have CFCs and need to consider the rules and reporting.
Where corporate groups exist and there are US domestic corporations in the mix, care needs to be taken. There are separate rules about this that can create CFCs without the usual ‘greater than 50%’ requirement.
If a UK company is a CFC, each US shareholder will need to include reporting for the company on their US tax returns each year.
If you have a CFC, you now need to consider the US rules. The two most common are Subpart F and GILTI, which we address in the next set of articles and videos.
If you would like to discuss any of the above and how it relates to your business, please get in touch with your usual Blick Rothenberg contact or Alex or Michael using the form below.
Our expert team
US/UK Private Client
Personal tax is one of the most complex areas of wealth management and can significantly erode your wealth over time.
Blick Rothenberg is considered to be market leaders in the taxation of non-UK domiciled individuals and offshore trusts, as well as cross-border personal taxation.
We have a strong base of clients in the UK and a broad and longstanding international focus too, acting for a large number of non-UK domiciled individuals and international families. So, we understand the complexities that US citizens face when living, working and operating businesses in the UK.
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