Any UK dividend income tax solutions? - US taxpayer contracting in UK

Hi everyone,

I found a few threads in this forum with similar questions as mine, but no real answers...  So I am posting my question (again) for potential answers or direction.

I am an American (soon to hold a British passport) and a US taxpayer living and working in the UK.  I am an independent consultant contracting in the UK under my own UK Limited Company.  For UK tax efficiencies, I make payments to myself primarily via dividends from the UK Limited Company (to not deal with PAYE Tax and NI Contributions)  Hence not paying oneself a salary or a small salary up to £833 GBP per month with a majority of the income payments in dividends for UK tax efficiency.

My question - and problem, is regarding the US (IRS) treatment of this dividend earned income when it comes to the Foreign Earned Income Credit.  The IRS treats this UK earned income as passive income, and thus the Foreign Earned Income Credit does not apply and the dividend income is taxed.  This US tax bill can be rather "hefty" for a fully engaged independent consultant with a good daily rate throughout the year!

Although I have looked at IRS friendly solutions to this tax problem, each of these solutions are either HMRC unfriendly or the solution severely erodes my UK tax efficiency.

Short of turning in my US passport (not an option) or going back to becoming a permanent employee drone, is there a tax solution to this tax problem?

Has anyone found a suitable tax solution that keeps most of the UK (HMRC) tax efficiency while at the same time limiting the US (IRS) tax liability - to contracting and paying themselves dividend earned income via their own UK Limited Company?

Look forward to replies.  Thanks in advance.

There are several possible solutions to this. Have you asked your tax adviser and/or accountant? What advice did you receive when you created the structure? Which informational returns are you currently filing with the IRS?

Yes, on both sides, as I mentioned in my posting.

Advice on the US side gets me in trouble with HMRC, and the advice on the UK side gets me in trouble with the IRS.  I have separate accountants / tax preparers for my US and UK Limited Company (as well as a separate one for my UK personal taxes).

I was hoping that someone would have experience with advisors who understand both sides of the coin and not just one side to this issue regarding UK dividends, earned income, not being treated as such by the US in the Foreign Earned Income Credit.  Or better yet, from experience, know of solutions that keep both sides happy (i.e. HMRC and IRS).  UK dividends are seen as "passive income" by the IRS, and therefore, excluded from the FEIC and taxed differently.  Even when building up the credit for the dividends for the next tax year, it's not enought to off-set the tax liability.

At the moment, it looks very much that a US taxpayer that wants to keep their UK tax efficiency using their UK Limited Company must accept that it will be eroded by the US tax liabilities on the UK tax efficiencies.

Thanks.