For many American expats living in the UK, setting up a UK limited company is a practical way to operate a business. The structure is familiar, flexible, and well-suited for solo entrepreneurs or small teams. However, for US citizens, owning a UK company introduces significant complexity due to US tax laws—specifically, the Controlled Foreign Corporation (CFC) rules under the Internal Revenue Code.
In this article, we’ll break down how a UK limited company is taxed in the US, explain the default tax treatment, and discuss options available to UK business owners who want to remain compliant while minimizing their US tax liability.
What Is a UK Limited Company?
A UK limited company is a legal business entity registered with Companies House. It offers limited liability to its owners and is taxed separately from them under the UK’s corporation tax regime.
Most UK business owners choose this structure because it simplifies business operations, separates personal and company assets, and makes it easier to manage UK tax obligations.
A UK limited company is considered a separate legal person from its shareholders for UK tax purposes—but that’s not how the IRS sees it.
The US View: Worldwide Taxation and Controlled Foreign Corporations
The US taxes its citizens and green card holders on their worldwide income, no matter where they live or where the income is earned. That means if you’re a US citizen or resident, your ownership in a UK limited company must be reported to the IRS, and in most cases, any undistributed profits may be subject to US income tax.
If you own more than 50% of the company (either directly or indirectly), your UK limited becomes a Controlled Foreign Corporation. This triggers special taxation rules under Subpart F and GILTI (Global Intangible Low-Taxed Income).
These rules are intended to prevent tax evasion by shifting profits to foreign companies in low-tax jurisdictions—but they also apply to legitimate UK businesses owned by American expats.
Default Tax Treatment of a UK Limited Company
The default method of taxation for a CFC (such as a UK limited company) is straightforward but harsh:
Subpart F income and GILTI income must be included in the owner’s taxable income, whether or not the company distributes profits.
You are taxed at ordinary income tax rates (up to 37%) on those amounts.
You do not get the Section 250 deduction by default.
You cannot claim a foreign tax credit for GILTI unless you make a special election (more on that later).
You are required to file multiple tax forms with the IRS, including Form 5471, which reports foreign business activities, income, balance sheets, and formation documents.
This often results in double taxation: once in the UK via corporation tax, and again in the US, even if you haven’t withdrawn any money from the company.
Why the Default Method Is Problematic?
1. Double Taxation
You might pay UK corporation tax on your company’s profits, and then pay federal income tax again on those same profits in the US. While the US-UK tax treaty helps in some cases, it doesn’t eliminate this issue entirely.
2. No Deductions or Credits
Without elections, you miss out on key tools like the Section 250 deduction and foreign tax credit, which help reduce your US tax bill.
3. Taxed on Undistributed Profits
Even if your UK company reinvests income into the business, you may still be taxed in the US, creating cash flow issues.
4. Complex Tax Filings
You must file Form 5471, potentially Form 8938, and possibly report the bank account under FBAR. These tax requirements create high compliance burdens and risks of penalties.
How to avoid double taxation in the US and UK?
You can make a Section §962 Election
This election allows an individual to be taxed as if they were a C corporation with respect to their share of Subpart F and GILTI income from a UK limited company. With a §962 election, tax is applied at the 21% corporate income tax rate instead of the individual’s higher personal rate.
The individual can also take advantage of the Section 250 deduction, which allows for a 50% reduction on GILTI income, and may claim the foreign tax credit to offset UK taxes paid by the company. However, future dividends may be subject to additional taxation. The election must be renewed annually and requires detailed tracking of earnings, basis, and differences in tax years.
You can claim GILTI High-Tax Exclusion
If your UK limited pays UK corporation tax at more than 18.9%, you may qualify for the GILTI high-tax exclusion.
The GILTI high-tax exclusion removes GILTI income entirely from U.S. taxation, eliminating the need for foreign tax credits or gross-up calculations. It is especially suitable for UK companies paying the standard 25% corporation tax rate. This approach, however, requires an annual election and must be applied consistently across all foreign entities. Filing Form 5471 remains necessary.
You can claim Foreign Tax Credit
If you’re not claiming the FEIE, you may be able to offset UK income tax on salary or dividends using the foreign tax credit.
The foreign tax credit generally cannot be applied to GILTI income unless a §962 election is made. It may also involve complex tracking and allocation of UK taxes paid.
You can treat the UK limited company as a disregarded entity
In some cases, a UK limited company can be treated as a disregarded entity for U.S. tax purposes by filing Form 8832. This removes the entity from CFC status, which can eliminate GILTI and Subpart F income. The U.S. owner is then taxed directly on the company’s income, and Form 8858 is required instead of Form 5471. This method is only available where the UK company has a single U.S. owner and may involve classification mismatches or other complications under UK law.
Restructuring or Strategic Planning
For some UK business owners, it may make sense to:
Change entity structure (e.g., use a US entity instead).
Convert to a disregarded entity or partnership where feasible.
Adjust salary vs. dividends for optimal taxation.
Ensure the company doesn’t create a permanent establishment in the US.
This option requires careful planning with a qualified tax professional.
IRS Filing Requirements
If you own a UK limited company as a US citizen or green card holder, you’ll likely need to file:
Form 5471 – Reports ownership and financials of the foreign company.
Form 8938 – If your foreign entities meet asset thresholds.
FBAR (FinCEN 114) – If the company has a bank account over $10,000.
Form 1116 – To claim foreign tax credits.
Income statement and balance sheet of the company.
Failure to file these forms can result in substantial penalties—$10,000 per missed form per tax year.
Who Is Subject to These Rules?
All US citizens, green card holders, and other United States persons who own more than 10% of a UK limited company are subject to these rules. Even if the company is entirely UK-based and earns only UK source income, the IRS still requires full disclosure and proper tax filings.
This includes:
Solo contractors using a UK limited for local work
Remote employees who incorporated to gain limited liability
American investors in UK startups
Dual citizens residing in the UK
Common Mistakes to Avoid
Assuming UK taxation is enough. The IRS expects US tax returns, even if you fully comply with UK tax laws.
Ignoring CFC status. Your UK limited company may be a CFC, even if you only own 51%.
Missing forms. Not filing Form 5471 or FBAR can result in automatic penalties.
Incorrect income classification. Salary, dividends, and profits need to be correctly categorized for US tax purposes.
Navigating UK Limited Company US Tax
Owning a UK limited company as a US citizen is incredibly common—but so are the tax pitfalls that come with it. Between UK tax, corporation tax, US tax, CFC rules, and the US-UK tax treaty, the risk of overpaying or misfiling is real.
With the right elections—like §962, the GILTI high-tax exclusion, or strategic use of the foreign tax credit—you can mitigate double taxation and reduce your US income tax burden. But it takes careful planning, the right forms, and often, help from a tax professional who understands both US and UK tax systems.
At 1040 Abroad, we specialize in helping UK business owners stay compliant while minimizing their tax obligations. If you’re ready to file or need help untangling your obligations, reach out today for a consultation.
