Bringing Revenue from US Operations Back to the UK

When a UK company does business in the US through a subsidiary, it is common for at least some of the gross revenue earned by the US entity to be transferred into the coffers of the UK parent. There are four basic mechanisms by which income generated in the US makes its way across the pond and into the accounts of a UK parent.

1. Intercompany sale of goods. For companies engaged in the sale of goods, often the US subsidiary serves as a reseller of goods that are supplied by the UK parent. Whenever there is a cross-border sale of goods between related entities, a transfer pricing agreement should exist which establishes the way pricing for those goods will be determined. Small and medium enterprises are usually exempt from UK transfer pricing legislation. In the US, however, no such exemption exists. As a result, sales between related entities are subject to 195 pages of Byzantine regulations promulgated by the US Treasury Department. Although other pricing methods may be available, typically goods are priced at: (a) the price that would be charged to an unrelated party under similar conditions, subject to certain allowed adjustments (the comparable uncontrolled price method); (b) the gross profit derived from resale minus an appropriate gross profit margin (the resale price method); or (c) the cost of producing the goods plus an appropriate gross profit markup (the cost plus method).

2. Intercompany services charges. Some UK companies only provide services to their US subsidiaries. Sometimes, services are provided in addition to goods being sold. As with the intercompany sale of goods, whenever services are provided to a related party, US transfer pricing regulations govern the pricing for their recharge. For certain purely administrative services, those services may be recharged at cost (the services cost method). For other types of services, intercompany charges are usually based upon: (a) the price that would be charged to an unrelated party under similar conditions, subject to certain allowed adjustments (the comparable uncontrolled services price method); (b) the gross services profit derived from the sale of the services to the customer or client minus an appropriate gross services profit margin (the gross services margin method); or (c) the cost of providing the services plus an appropriate gross profit markup (the cost of services plus method).

3. Royalties. A royalty is a payment made to the owner of an intellectual property (IP) right for use of the IP. When a UK company establishes a US subsidiary, it is common for the UK parent to license the use of certain IP to the subsidiary. This could include, for example, the use of the UK parent’s trade or service mark, the use of the UK parent’s software, or the right to use the UK parent’s patent. Since the UK parent incurred the cost of – and received the benefit of deductions for – the development of the IP, it is necessary and proper for the UK company to charge the US company a royalty for the US subsidiary’s use of the IP. As with other payments between related parties, the amount paid must reflect the fair market value of the IP. Since IP rights are usually unique, determining the proper charge can be a challenge, to which special US tax rules apply.

4. Dividends. If, after accounting for all the intercompany charges above, the US company has a profit, all or part of those profits can be repatriated to the UK parent by causing the US company to issue a dividend. Subject to a few exceptions, dividends paid by a US subsidiary owned 80% or more by a UK parent can be paid free of US withholding tax. In addition, under Sections 931B and 931D of the UK’s Corporation Tax Act 2009, a dividend received from a US subsidiary will – subject to limited exceptions that must be considered – usually be received by the UK parent free of UK tax. Since dividends are paid out of after-tax profits, the result is that the profits being repatriated are subject only to tax at the applicable US rates.