UK company implications for US tax

Hello helpful people,

As a hobby, I take part in roller derby.  The league I am part of is set up as a limited by guarantee company.  About a year ago, I became a director of the league.  There were three of us directors then and there are now five.

It has been suggested to me that this will have some implication on my US taxes.  I cannot see how this is the case, but maybe I am just missing something.

I get no income from the company.  It is set up so that all members (of which there are currently about 60) have an equal share in it, but it also specified that all money must be reinvested in the company and none of us will ever get a payout from it.

I have a full-time job and my directorship of this company is purely a hobby.

Is it true that I am somehow going to have to pay tax on the company's profits even though I personally get no money at all from it?

Thanks for any advice!

You should read the instructions for both Forms 5471 & 926, penalties for failure to file these are $10,000 a Form each year so if you are late this could be costly (with 60 owners it is unlikely).  It may be a PFIC if it not a CFC so you may have annual Form 8621 filing instead - the penalties there are also $10,000 a Form per year.

Finally you have presumably been including this in your annual Form TD F 90-22.1 filing with the US Treasury - where penalties are even more horrid...

The message here is to comply with the IRS even though it is a painful thing to do!

OK, none of that makes any sense to me.

No, I have not been filing anything at all relating to this.  It never even occurred to me that I would have to.

I do roller derby as a hobby, and I'm a director of the league in order to help it out.  I'm not making any money from it and never will.

I'm at a point of complete ignorance on this topic, so I'll need someone to explain at a really simple level.

I don't even understand why I would need to file anything for this.

I have not been filing Form TD F 90-22... I had never heard of it before and my own personal assets are not enough to require my filing it for my personal accounts.  But I am a signatory on the business account, so I guess that is a problem.

Oh, it is not a CFC as it is owned primarily by UK citizens.

Might the IRS really charge such fees in this case?  It's a not-for-profit company, a sports club!  I don't have anywhere near $10,000!  (I guess the IRS doesn't care about that.)  But my "shares" in the company are valueless and this is not an investment or an attempt to make any money.

You might want a lawyers opinion on this but I don't think the phrase "company limited by guarantee has any meaning in the US - I suspected it is not a CFC because of the number of owners; but it may still be a PFIC based on the assets or income test.  Given that it presumably will never make excess distributions this might be moot - except that the IRS may still insist on annual filing of an 8621 Form.

The TD F 90-22.1 carries significant penalties so I would suggest you file late forms and attach explanations of reasonable cause to each Form.  Remember if any account ever goes over $10,000 even for a second you must file a Form disclosing all accounts.

But my "shares" in the company are valueless and this is not an investment or an attempt to make any money.

I know you put "shares" in quotes, but just to force this point home, you do not have any shares! No one does! The company does not issue shares!

More about this type of company .... click here.

I am a Company Secretary of a company limited by guarantee. The company documents make it very clear that none of the directors receive any remuneration, and should the company ever get wound up, none of the members will receive a penny. Instead any funds would need to be donated to an organisation carrying on a similar sort of activity.

John - if it is not within 501(c)(3) then it is not a charity under US law.  In fact this is moot unless (unlikely I guess) it makes excess distributions or on death since it may well be a PFIC.

The FBAR reporting has zero relationship to tax liability - but is nonetheless a Bank Secrecy Act requirement.

I don't claim to know the "small print" in the US tax legislation, but by PFIC you presumably mean Passive foreign investment company? If so, what is described on this Wikipedia webpage, is not true either.

The company mentioned by FormicaLinoleum is clearly not "a foreign company with predominantly investment income, or whose assets are primarily intended to generate investment income".  And even if it were FormicaLinoleum is not a shareholder of the company ... there are no shareholders!

Is it suggested that FormicaLinoleum should have taken some action merely on account of the fact that he is a Director of the company?

Yes, thanks, John.  That is all true.  This company is an amateur sports league.  In no way is it an investment for anyone as no person can put money into it or get money out of it.  We do not aim to make money, but if we did have a profit, 100% of that has to stay within the company and support the activities of the sports league.  There can never be payouts, even on dissolution of the company.

It's not a CFC and it's not an investment company.

Theoretically, if there is some tax implication of being an "owner" of this company, this would apply to all our American members, not just directors.  I just can't believe that there can be a tax implication of being a member of a UK sports club!

On a philosophical point all these issues stem from the US's strange practice of taxing on citizenship rather than residence. I'm a UK/US dual citizen resident in the US and I don't have to fill any UK forms in or comply with any UK tax regulations because all my income and finances are in the US. As long as the US taxes worldwide income on citizenship issues like yours will crop up.

Nun, you mean you have income in the US but that income is not remitted to the UK? If so I really do think you should read up the detail of the UK's new rules concerning remitted and non-remitted income.

Of course you have not told us the nature of the income and there could be something in the DTA ... double taxation agreement .... that might assist you.

Nun, you mean you have income in the US but that income is not remitted to the UK? If so I really do think you should read up the detail of the UK's new rules concerning remitted and non-remitted income.

Of course you have not told us the nature of the income and there could be something in the DTA ... double taxation agreement .... that might assist you.

Thanks for the heads up, but I have no liability to UK tax as I'm not resident or ordinarily resident in the UK and have no income or gains of any sort in the UK. I was comparing the US practice of taxing it's citizens on a world wide arising basis to the UK approach of using factors like residence, ordinarily resident and domicile. The two approaches can present some interesting circumstances for dual citizens.

Yes, thanks, John.  That is all true.  This company is an amateur sports league.  In no way is it an investment for anyone as no person can put money into it or get money out of it.  We do not aim to make money, but if we did have a profit, 100% of that has to stay within the company and support the activities of the sports league.  There can never be payouts, even on dissolution of the company.

It's not a CFC and it's not an investment company.

Theoretically, if there is some tax implication of being an "owner" of this company, this would apply to all our American members, not just directors.  I just can't believe that there can be a tax implication of being a member of a UK sports club!

Do not get too worked up about the word "company" - this is the default entity classification given that that it is nothing else.

It is probably a PFIC based on failing the 50% or 75% test but this is still moot if there are never excess distributions...I don't invent the rules!

According to that Wikipedia webpage :-

Tax code sections 1291 through 1297 provide the rules for U.S. persons who invest in passive foreign investment companies.

-: but FormicaLinoleum has not invested in the company! Indeed no one has invested in the company! There are no shares! No one has invested a penny!

So if the quoted words from Wikipedia are correct, is there still a problem?

Is everyone reading this topic happy they understand the concept of a company limited by guarantee?

John - so how would you deal with a stiftung, Foundation or other entity without what you describe as owners?  Is it a foreign trust?