4 Reasons Your UK Company May Need to File a US Tax Return

Does your UK company need to file a tax return in the US? Here are 4 reasons why you might.

1. You have US sourced income. If you have income that the IRS considers to be income from sources within the US, you need to file a US tax return. For most businesses this would include: (1) revenue from services physically performed in the US; (2) revenue from the sale of inventory, where title transfers to the customer on US soil; or (3) royalties paid for the use within the US of certain property (including trademarks and software licenses). If your company has no “permanent establishment” (as defined by the US-UK tax treaty), then your sole obligation may be to file a “protective 1120-F,” claiming the tax treaty’s benefits.

2. You are engaged in an activity which creates corporate income tax nexus with a US state. Each state decides for itself – within the constraints of the US constitution – whether a foreign corporation is required to pay corporate income tax on profits apportioned to its jurisdiction. States are not bound by the federal government’s tax treaty with the UK, although some choose not to tax income that is exempt under the treaty. The presence of inventory (even in a third-party warehouse), the appointment of independent sales representatives, or sales over certain monetary thresholds may each give rise to corporate income tax nexus. While some interstate sales may be immune from state corporate income tax under a federal law known as P.L. 86-272, most states take the position that P.L. 86-272 does not apply to international sales. To decide whether you need to file a state corporate income tax return, consider: (a) whether you are engaging in activities that create corporate income tax nexus; and (b) whether that state considers income to be exempt from state taxation if exempt from federal taxation.

3. You have sales tax nexus with a US state. The laws dictating whether sales tax must be collected and remitted treat UK corporations identically to US corporations. In addition, the nexus rules that apply to state corporate income tax are not the same as the nexus rules that apply to state sales tax. As a general rule, a UK company selling to US customers must register, collect, and remit sales tax in any state where: (1) the company has a physical presence (e.g,. inventory or independent sales representatives); or (2) the company has exceeded certain economic nexus thresholds. Whilst each state decides for itself which economic nexus threshold is to apply, the most common threshold is $100,000 or more in sales per year or 200 transactions per year. Sales tax (which is not reclaimable) is remitted to the state of shipment. Returns are usually filed monthly, quarterly, or annually, depending on your volume of collections.

4. You have a US based employee. Although it is almost never a good idea for a UK company to directly employ a US based person, it is possible for a UK company to do so. Obviously, employing a US person requires filing of federal and state payroll tax returns (similar to PAYE in the UK). In addition, employment of a US based person will usually create a “permanent establishment” in the US, requiring the filing of a federal tax return and the payment of tax on any profits apportioned to this permanent establishment. A US employee will also trigger state corporate income and sales tax nexus, leading to additional state level filing obligations.