I am a dual Swedish/US citizen who has resided in the UK for over ten years now. To date the bulk of my income has been employment income from UK registered employers.
I am considering a business venture which would involve an equity stake of 25% and a directorship in a newly formed UK private limited company; the business model involves the sale of redeemable credits to other businesses, with the proceeds held in low risk interest bearing securities until redemption, as well as the provision of ancillary consulting services. For this venture, my investment would be my time and expertise in designing and building the systems that will initially operate the business.
From a US tax perspective, I understand that this would not be a CFC but as my stake would be over 10% I would need to file form 5471 with a full GAAP income statement / balance sheet with my 2011 return next year.
My major concern is that the company would be considered a PFIC by the 50% asset test and thus when it does pay dividends after a few years, they will all be treated as excess distributions.
My questions are:
1) How can this service company be structured so that the asset test is passed and thus be treated as a normal company? The majority of the assets would always be operating cash or liquid financial instruments from the second year on.
2) If section 1291 treatment cannot be avoided, would making a QEF election be feasible? Also, in early year, would I be able to borrow money from the company to pay my US tax due on undistributed earnings and capital gains to be paid back later when he company actually pays dividends?
3) If one owns stock in, and is employed by, the same company, could wages/salary ever be considered an excess distribution? These payments would go through UK P.A.Y.E. and have UK tax/national insurance deducted and would only arise by my service as a director, and would have no bearing on my share holding.
As none of the other principals are US taxpayers, they have been quite surprised by these questions as it is far more straightforward from the UK standpoint.
As it really shouldn't be that hard for a US citizen to setup or join a company in the UK, I would be interested in hearing from anyone who has setup a firm here, even if it was just for contracting, and how they dealt with these issues.
