Question

1. Egor, a United States citizen, is engaged in numerous, diverse operations and pays U.S. income tax at a rate of 37%. Egor owns MY LLC, a disregarded entity for U.S. tax purposes. MY LLC manufactures the ubiquitous product, widgets. U.S. sales result in $100,000 of taxable U.S.-source income. Egor projects that he could earn approximately $100,000 of net income in the United Kingdom (the "U.K."), where the corporate income tax rate is 20%. To further limit his liability (widgets being a very dangerous product); Egor’s MY LLC forms a private limited company in the United Kingdom. The private limited company in the U.K. is not a "per se" entity and, therefore, Egor (via the MY LLC) would consider checking-the-box to treat the private limited company in the U.K. as a disregarded entity. Assume that both the withholding tax rate on any dividends from a U.K. private limited company to the United States is 15% and that the title on all widget sales passes in the U.K.

   1. If the U.K. private limited company is "checked," what is Egor's foreign tax credit position in Year 1 if an $80,000 dividend is distributed for U.K. tax purposes?

   2. If the U.K. private limited company is "checked," what is Egor's foreign tax credit position in Year 1 if a dividend is not distributed for U.K. tax purposes?

   3. What is Egor's foreign tax credit position in Year 1 if the U.K. private limited company is not "checked" as a disregarded entity and pays a dividend of $80,000 to the MY LLC?

   4. What is Egor's foreign tax credit position in Year 1 if the U.K. private limited company is not "checked" as a disregarded entity and does not pay a dividend?

Answer 1

The basic objective of an income tax treaty is to mitigate double taxation by reducing or eliminating the foreign country treaty partner taxes on specified items of income realized by US persons in that foreign country.US FTC is only available for foreign tax on foreign income. An outbound US enterprise in a foreign destination country and any conduit country Branch considered as a disregarded entity - current US income taxation in profits and loss deduction availability in the US 1. Egor projects has produced widgets and would have been required to pay income tax of $1,00,000 x 37% = $37,000 under generally imposed income tax. None of the tax would be imposed solely because of the $75,000 maximum available US credit. The entire $37,000 would be creditable. Excess foreign tax credit can be carry forward to next year. 2. The dividend as grosses up is to include the allocated income tax amount: Profits from widgets. $1,00,000 US tax rate @37%. $37,000 UK tax rate @20% on us tax rate. $7,400 [$37,000x 20%] Dividend. $80,000 US GOVERNMENT POSITION $80,000/$1,00,000 - $7,400 x $7400. = $6393(credit) TAX PAYER POSITION $80,000/$37,000 - $7400 * $7400. = $20,000( CREDIT)