Kingston Smith North America Group

Transcription

1 Kingston Smith North America Group Doing business in the US

2 An introductory guide for UK businesses Many UK businesses are attracted to the US market due its size and the opportunities on offer, particularly in sectors where the UK excels. We talk the same language, and the US is culturally similar to the UK. However, opportunities come with risks. The US corporate and tax regime is substantially different from that of the UK, and it is easy to end up with an inefficient business structure. The legal system also varies from state to state. This guide has been prepared to give a UK based SME an introduction to the key considerations it should address before making the big leap across the Atlantic. As with any publication of this nature it comes with a health warning, in that you should always seek professional advice before proceeding. This publication addresses these areas in overview: Where in the US to locate Choosing the right structure for your US operation Foreign personnel in the US Immigration and visa issues Accounting and auditing considerations Other matters Where to locate In a country of 3.7 million square miles with 50 politically separate states and the District of Columbia, deciding where to locate your head office is an important one. The US is characterised by a tax system at federal, state and city level, and a legal system that differs from state to state. Factors to take into consideration include: Whether you plan to raise finance in the US Where your customers or clients are based The differing state and city rates of tax Time zones working with the East Coast is much easier for communication with the UK Where key management is located Many overseas companies choose to use Delaware incorporated entities, for various reasons such as: Favourable laws for corporate governance A clear and consistent legal system State tax laws favour those companies not doing business in the state, with plans to do business across the US Time zones working with the East Coast is much easier for communication with the UK The ability to raise finance more easily 1 Kingston Smith

3 For a new company looking to attract outside investment from angels, venture capitalists and private equity in the US, incorporating in Delaware is often the preferred route. Many investors will only invest in a Delaware C corporation, so starting off with a Delaware corporation from the beginning can save some legal and accounting headaches later. In addition, Delaware s laws regarding securities and management fit in with the expectations of professional investors. All around the US, corporate attorneys are well-versed in Delaware law, so if a company needs to obtain a legal opinion or other documentation this is an advantage of setting up in Delaware. MORE OFTEN THAN NOT, IT IS A CLIENT OR CUSTOMER NEED WHICH DRIVES A BUSINESS TO START TRADING WITH OR IN THE UNITED STATES There is no reason why a Delaware corporation cannot be based in another state, and the location of customers usually dictates this. So for example, media and content companies typically head to New York City, technology goes to San Francisco, and film & TV to Los Angeles. You could form a corporation under California law to operate in Los Angeles, but that may be problematic if for example the company then relocates to New Orleans as lawyers there may not be familiar with California corporate law; however, they would more likely be familiar with the laws of Delaware. A company will need to register (and pay a fee) to do business in every state it trades in, and will pay state and city taxes accordingly. These vary between states and between cities (e.g. California 8.84%, New York 7.1%, New York City 8.85%). A company will also pay federal taxes wherever it is located up to 35%. A Delaware company is therefore not necessarily better for US tax purposes. Choosing the right business structure More often than not, it is a client or customer need which drives a business to start trading with or in the United States. How a UK business sets itself up for business in the US will likely change in time as trading activity expands. At first this might be no more than conducting business directly from the UK. Further down the line, a permanent establishment may arise, and a branch set up, or a US subsidiary established. Directly trading from the UK Quite often, an expansion into the US starts off because a company wins a new client in the US. It then starts to service that client from the UK, and otherwise has no place of business no office, no server or website, no US entity, no US based staff or management. However depending on what your company does, your UK company may still be subject to US federal taxes on payments for licensing computer software that is used in the US. So for example, royalties for licensing IP may be subject to US withholding tax. If the UK company is then eligible for benefits under the UK-US tax treaty, the rate of withholding tax imposed may be reduced from 30% to nil, assuming that the royalties represent a fair charge. In order to claim exemption from US federal withholding tax, a UK company must provide a form W-8BEN to its client or customer, which states its US EIN, or Employer Identification Number. This is obtained by completing Form SS-4 from the Internal Revenue Service ( IRS ). In turn, the Officer or shareholder that obtains this number must have a U.S. Individual Tax Identification Number ( ITIN ). If he or she does not have an ITIN, then obtaining one could be a lengthy and complex process which involves filing Form W-7 and submitting documentation with this Form. Kingston Smith 2

4 company s behalf, this does not by itself result in a permanent establishment, and therefore trade being subject to US income taxes. You should also be aware that the IRS can challenge an independent agent determination, if that agent is not truly independent. Trading through a subsidiary Trading through a branch A branch is part of another entity, such as your UK operating business, and is not a separate legal entity in the US. Generally, branches are subject to US income tax on profits from business conducted in the US. Customers need may lead you into wanting a presence in the US, such as a sales operation. Or you may need to hire a US employee or dedicated agent. The exact facts and circumstances will determine if this gives rise to a permanent establishment in the US. Quite often this arises from having US employees that are negotiating and concluding contracts that bind the UK company. This being the case, the branch will be subject to a US federal branch profits tax rate of 30%. If the company is eligible for benefits under the US-UK tax treaty, it may be exempt or subject to a reduced rate of 5%. Since branches do not provide any tax advantages over corporations/subsidiaries, and require US tax filing by the UK entity, as well as having to file US financial statements in the UK, the formation of a US entity or subsidiary is commonly preferred over a branch. Trading through an independent agent Some UK companies opt to trade through a US independent agent (i.e. someone who works with several unrelated companies), particularly if they are selling products. Even if those agents can solicit, negotiate and conclude transactions on the UK As activity levels increase and you fall into having a permanent establishment, you may need to set up a subsidiary. Commonly, this will either be a Limited Liability Company ( LLC ) or a Corporation ( Inc. ). Sometimes commercial factors will drive this decision to set up a subsidiary, such as having the need to demonstrate a true physical presence, or because a US business will only contract with another US entity, as is often the case with government contracts. An LLC provides limited liability for its owners whilst maintaining a single level of tax (only the LLC s members are subject to tax with respect to the LLC s income), and broadly offers the advantages of a partnership i.e. flexibility whilst eliminating some of the drawbacks of these entities. Since they have flexibility for US tax planning, their use is common. Typically, a UK entity will set up an LLC with share capital so that it is a qualifying subsidiary for Employee Management Incentives ( EMI ) and Enterprise Investment Scheme ( EIS ) purposes in the UK and so that the group meets the requirements for a number of other UK tax reliefs such as the dividends exemption and the substantial shareholdings exemption. It would also check-the-box so that it is treated as a C corporation for US income tax purposes, resulting in the LLC, and not the members, being subject to US income tax. The LLC would also be treated as opaque by HMRC, avoiding the possibility of profits in the LLC being taxed in both the US and UK without relief. This may not be so attractive where the US entity has local shareholders and in that situation it may be more attractive to have a US LLP, or not check-the-box with respect to the LLC. A corporation is a separate legal entity incorporated under the laws of one of the states or the District of Columbia. This is a common form of subsidiary 3 Kingston Smith

5 established by a UK business in the US, and they could be subject to income tax, state and local taxes on worldwide income regardless of where it is earned. A C Corp is most like a limited company in the UK. Corporations are taxed like a LLC that made the check-the-box election outlined above. Their earnings are generally subject to double taxation, initially at the company level and then at the shareholder level when the company distributes these earnings (i.e., pay dividends). Dividends are not deductible by the corporation. Distributions to a UK company by its wholly owned US subsidiary are exempt from 30% withholding tax, and generally exempt from UK corporation tax. In setting up a US corporation you will need to determine who will be the Officers and Directors. It is not a requirement to have a US individual as a director, although preferable. What s key is that the company is controlled from the US, meaning that all board meetings should be held outside the UK. This will avoid the possibility that HMRC deems the US company as also being a UK tax resident. Avoiding UK residence when there is not a strong US based board of directors requires careful attention to governance issues. Impact on your UK structure Assessing the structure of your business in the UK is a key part of establishing a subsidiary in the US. This is because it s important to protect your UK business as far as you can from any things that might go wrong in the US, driven by the extremely litigious environment. A typical structure might look like the diagram below. The UK buffer co company is an entity that is not always put in place, but it does add a further barrier to protect the UK operating company from legal actions in the US. Incorporating a UK holding company requires a share for share exchange, such that the investors in the UK operating company exchange their shares for an equal number of shares of the same type in the UK holding company. The operating company then becomes a 100% subsidiary of the holding company. We always recommend requesting clearance from HMRC for this transaction. Investors UK HoldCo Non-trading UK BufferCo Non-trading UK TradeCo Trading US LLC or C Corp Trading Kingston Smith 4

6 Transfer pricing Transfer pricing is the procedure adopted by most advanced countries to ensure that trading between connected entities is on the basis that it does not reduce the tax base locally. Generally taxable profits need to be calculated on the basis of arms length pricing. Transfer pricing does not just apply to the supply of services and goods, it affects all transactions between the entitles such as provision of management services, IT and marketing support, use of IP rights, financing costs and so on. Any entity which has controlled international operations and intercompany transactions is subject to US transfer pricing regulations. Under this regime, a company must disclose detailed information on controlled transactions with foreign entities, and this is done alongside the filing of the tax return. Whilst it is not mandatory to have documentation of a transfer pricing study, it is highly advisable to have this prepared simultaneously with the filing of the US tax return for the fiscal year under consideration to qualify for penalty protection. In the event that the tax authority requests documentation, it must be presented within 30 days of the request. GENERALLY FOR TAX PURPOSES, TAX NEEDS TO BE CALCULATED ON THE BASIS OF ARMS LENGTH PRICING. Foreign personnel in the US Foreign nationals seeking entry into the US as nonimmigrants are required to have visas which should be applied for at a US Consular Office. They are referred to as aliens and for US income tax purposes, are classified as either resident or non-resident. In the year of entry or departure, an alien may be classified as both resident and non-resident, and this is critical to determine the proper tax liabilities for the year. An alien is categorised as non-resident unless he or she meets one of the two residency tests. The first automatically classifies an alien as an income tax resident if the person is a lawful permanent resident, a status obtained through holding a Green Card at any time in a year. The second test giving rise to alien resident status is the substantial presence test meaning the person must be in the US for at least 31 days during the current year and 183 days over a period encompassing the current tax year and the two preceding years, as computed using a formula based upon what year in the look back period the days are spent. US taxation of resident aliens A resident alien must report, and is taxed on, worldwide income in the same manner as a US citizen. The system assumes an individual has been a US tax payer their entire life, so for instance the sale of property bought prior to the non-resident alien becoming a resident will take into account the original cost when acquired, even if it was many years before. Personal tax advice is therefore essential before establishing tax residency in the US. The US tax system allows for relief from double taxation via the US-UK treaty rules. It is possible that with differing rates between the UK and US or timing differences or foreign exchange rates between the receipt of foreign income and the payment of foreign income taxes, a full credit will not be available. Each circumstance needs separate consideration. 5 Kingston Smith

7 A RESIDENT ALIEN MUST REPORT, AND IS TAXED ON, WORLDWIDE INCOME IN THE SAME MANNER AS A US CITIZEN. A federal tax return is due by the 15 April for the previous calendar year to avoid penalties and interest, although extensions are available to 15 October. Resident aliens can claim the same deductions as US citizens, there are many and some can be unusual from a UK context. An individual should keep copies of all invoices and receipts, and take professional advice. The current highest level of income tax is 39.6%. Most states and a few cities may impose other taxes on resident individuals, and require annual returns by 15 April, meaning an individual may need to file at least 3 returns each year. Not forgetting that a UK income tax return may well be due as well, in particular in a year of entry or exit into the US as a resident alien. With a few exceptions, resident aliens are generally not required to report US or worldwide assets, unless they are depreciable assets used in a rental or business activity. The exceptions are limited to reporting international assets such as non-us bank and financial accounts and ownership of non-us entities and trusts. There are a few important matters to remember: Where a Green Card is obtained for someone transferring from the UK then they will still be liable to US taxation if they retain the Green Card after moving back to the UK or elsewhere. It may be appropriate to surrender the Green Card in that situation. However, where a Green Card is surrendered, there is a possible exit tax charge from the US on worldwide assets if they are worth more than $2 million. Careful planning is required in this situation. US taxation of non-resident aliens Non-resident aliens are required to file an annual federal return reporting their US sourced income for the previous calendar year. Most states also ask for an annual return and pay taxes on income sourced in that state. Payment is due by the 15 April for the previous calendar year. Kingston Smith 6

8 Immigration and visas This should be one of your earliest considerations, but frequently is the last one and only after putting foot on US soil. Visiting the US on an ESTA might work at first if setting up a business or for business meetings, and is cheap and can be quickly obtained online. However if you or your employees need to work in the US for extended periods of time over 90 days and/or you are making frequent business visits into the US, you need to consider applying for an appropriate visa. There are numerous types of visa, and you are best advised to contact a specialist immigration lawyer. Business travellers can apply for a B-1 or Visitor for Business visa. If you want to establish an entity in the US and send people from the UK, the most common types of visa are the E-2 Treaty Investor visa or the L-1 Intra-Company Transfer visa. holders to come and go as they please, provided they meet certain visa requirements, and requiring a minimum investment for the type of business that is being set up in the US. It allows a business to be run fully fledged. The L-1 is a non-immigrant visa which allows companies operating both in the US and abroad to transfer certain classes of employee (managers/executives or specialised knowledge staff) from its foreign operations to the US operations for up to seven years. The employee must have worked for a subsidiary, parent, affiliate or branch office of the US company outside of the US for at least one continuous full-time employment year out of the last three years. Employees are typically granted an initial L-1 visa for between one and three years depending on the amount of time the US company has been operational. Visas can be applied for at a US Consular post abroad typically after approval of a petition from US Citizenship and Immigration Services. The E-2 visa, commonly known as an investor visa is given to individuals who go to the US to either purchase or create a new business. The E-2 visa, it has been said, is the next best thing to permanent residency, allowing 7 Kingston Smith

9 Accounting and auditing considerations Just as in the UK, an entity is required to establish an appropriate method of record keeping that will enable proper reporting of the results of business operations to clearly reflect income. This starts with understanding state and federal requirements. A company without inventory/stock can generally elect the cash, accrual, or a hybrid method of accounting; above a limit of $5 million average annual gross receipts, a company must use the accruals method. It must also select an accounting period end, many US companies elect to have a December year end, although this is not necessarily compulsory. Accounts must be prepared under U.S. Generally Accepted Accounting Principles (US GAAP) for US reporting purposes. However a private company without bank debt or any other third party reporting obligations may only have to prepare accounts in order to prepare a US corporate income tax return, and thus not need GAAP. Prior to the inclusion of the results within the UK consolidated results (if required), adjustments should be made to bring the results into line with UK Generally Accepted Accounting Principles or IFRS as appropriate. An entity will need to decide how it will manage its financial affairs, and whether it will maintain its accounting records in the US through outsourced providers, own US staff or through its finance team back in the UK. Either way, a company should utilise accounting software which can handle foreign currencies and be ideally accessed on line through the cloud. ACCOUNTS MUST BE PREPARED UNDER U.S. GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (US GAAP) FOR US REPORTING PURPOSES. From an audit perspective, for private companies there is no mandatory audit requirement in the US, although there may still be a need from a UK group reporting perspective. Kingston Smith 8

10 Other matters Setting up in the US is not something done lightly. The market opportunity is big, especially for UK companies in sectors where the UK excels, such as the creative sector and technology. However, setting up in the US doesn t come without a cost, every state has different taxes, laws and regulations, there s a litigious environment, and despite speaking the same language, there are subtle cultural nuances. There are other key considerations you will need to address. For instance: Other taxes property taxes, sales and use taxes need to be considered. Grants and local incentives often these are available for setting up a business in certain areas of a city. For instance, for San Francisco see New York or Los Angeles You can also get a sense of what may be available at UK Trade & Investment ( UKTI ) can also assist by providing market research, networking and contacts in the US, their website is Human Resources - you will need to employ a lawyer to draft legal contracts, such as employment or shareholder s agreements. Labour laws are numerous and vary from state to state. Healthcare benefits need to be considered and provided for, as there is no National Health Service equivalent in the US. Share incentives - you may wish to incentivise US management through options, and therefore you will need to consider how best to structure these from a tax perspective, as well as comply with federal and state securities laws. In the US, there are Incentive Stock Options (ISOs), which can result in shares being taxed at capital gains rates. Insurance the US is a substantially more litigious environment than the UK. In addition the loser in litigation is not required to bear the victor s legal fees, meaning substantial expenses can still be incurred even if the outcome is favourable for you. Intellectual Property ensure your IP is protected in the US market with patents, trademarks, and copyrights. Avoiding traps through using work for hire. Setting up a bank accounts and obtaining credit you or the company will have no credit history in the US, making it a longer process to set up a bank account, or even obtaining a mobile phone on contract. Talking to a bank early on is highly recommended. How we can help you We can take a lead on helping you with all aspects of setting up in the US, advising you in conjunction with our associate firms based across the United States. We are also well connected with other professionals on both sides of the Atlantic that can assist you: corporate, personal and immigration lawyers, bankers, patent attorneys, and HR consultants. And of course UK Trade & Investment and other US business organisations. Disclaimer This publication is designed to provide an overview of certain key considerations involved in establishing a business in the United States. It is not meant to cover every possible scenario, fact or consideration a business needs to know. Whilst every attempt has been made to keep this publication current and concise, on-going changes in legislation in the United States and the United Kingdom will mean that this publication could be out of date at the time of reading. You should always consult your professional advisers to obtain specific advice relevant to your business and situation. Kingston Smith LLP and its subsidiaries cannot accept responsibility for the consequences resulting from actions taken on the basis of this publication. IRS Circular 230 Disclosure: any US tax advice herein was not intended or written to be used, and cannot be used, by any tax payer to avoid US tax penalties. Any such tax advice that is used or referred to by others to promote, market or recommend any entity, plan or arrangement should be construed as written in connection with that promotion, marketing or recommendation, and the tax payer should seek advice based on the taxpayers s particular circumstances from an independent tax adviser. Published August Kingston Smith

11 Checklist Action Completed Select your advisers in the UK and US to help you. Determine the nature of your US trading - with US/in US/independent agent. Determine the location of your entity in the US, and the type of entity (LLC, Inc etc). Decide where to register for business. Review and determine the group structure, including in the UK. Consider transfer pricing. Put in place a team to run the US operation. Assess the personal implications for any staff sent to the US, including remuneration and benefits (especially medical) and personal tax filing obligations. Obtain appropriate visas for individuals heading to the US. Get adequate and appropriate insurance cover. Determine the need for extending IP and trademark protection to the US market. Have relevant legal agreements drawn up, such as employment contacts, shareholder agreements and standard customer contracts. Determine how basic administration will be done, such as payroll, bookkeeping, tax filings, HR, office management and so forth. Open a bank account so you can start to make and receive payments. Assess what grants and incentives might be available for you. Kingston Smith 10

12 How Kingston Smith can help As a top 20 firm of Chartered Accountants, we have the capabilities to support you as your business develops both in the UK and overseas. Kingston Smith is dedicated to providing businesses with strategic support and practical, commercial advice. With our in-depth knowledge, experience and capabilities, we share areas of best practice to help you grow your business. Our North America Group can support you in all tax and accounting matters that you and your business will encounter as you expand into the US market. We work closely with other professional firms and advisers, meaning that you have a ready-formed network in place, enabling you to expand quickly and efficiently. Richard Heap Partner T +44 (0) rheap@ks.co.uk Graham Tyler Partner T +44 (0) gtyler@ks.co.uk Jon Sutcliffe Partner T +44 (0) jsutcliffe@ks.co.uk Mike Hayes Partner T +44 (0) mhayes@ks.co.uk Our offices London City Devonshire House 60 Goswell Road London EC1M 7AD UK London West End 141 Wardour Street London W1F 0UT UK Los Angeles Suite Wilshire Blvd Santa Monica CA USA Other Kingston Smith offices at Heathrow, Redhill, Romford and St Albans KS International offices in California, Illinois, Massachusetts, Minnesota, New York, Texas and Washington DC IAG members in California, Florida, Illinois, Kansas, Massachusetts, New Jersey, New York, Ohio, Texas and Washington