Expanding a UK-based business into the United States represents a monumental step towards accessing one of the world’s largest and most dynamic markets. Total trade in goods and services between the UK and US was £315.1 billion from Q4 2022 to Q3 2023, signalling the magnitude of the commercial relationship between these two countries.
However, this venture comes with a labyrinth of legal and tax considerations that require careful navigation. Understanding these essentials is pivotal for a successful expansion while mitigating the risks associated with non-compliance.
Legal framework for UK businesses in the US
Business structure
Choosing the right business entity is crucial. UK businesses often opt for a corporation or a limited liability company (LLC) when establishing a presence in the US. Each has its implications for liability, taxation and operational flexibility.
For instance, an LLC offers pass-through taxation and fewer corporate formalities, while a corporation provides a structure familiar to investors but with potential double taxation on dividends. It’s best to seek advice from specialist tax lawyers while crafting and executing expansion plans.
Federal and state regulations
The US is characterised by its federal system where laws can vary significantly from state to state. This affects not only how businesses are incorporated but also operational aspects like employment law, sales tax and privacy regulations.
Therefore, understanding and complying with the regulations of the specific states in which you plan to operate is as important as adhering to federal laws.
Intellectual property protection
The US market is competitive, making the protection of intellectual property (IP) a critical concern. UK businesses should ensure their trademarks, patents and copyrights are registered and protected in the US.
The United States Patent and Trademark Office (USPTO) is the federal agency for granting US patents and registering trademarks, which is a process that should be initiated well ahead of the planned expansion.
Tax essentials for UK businesses in the UK
Understanding US tax obligations
The US tax system is complex, involving federal, state and potentially local taxes. For corporations, the federal corporate income tax rate is a flat rate on the net income of the corporation. States and localities can also levy taxes, with rates and rules varying widely between them.
Double taxation avoidance
The US and UK have a Double Taxation Agreement (DTA) in place, aimed at preventing double taxation of income earned in one country by a resident of the other country. UK businesses should familiarise themselves with the DTA to understand how it affects their US operations, particularly concerning withholding taxes on dividends, interest and royalties.
Transfer pricing
Multinational companies must comply with transfer pricing rules, ensuring that transactions between related entities are conducted at arm’s length prices to prevent profit shifting and tax avoidance. The US Internal Revenue Service (IRS) is vigilant in enforcing these rules, and compliance is essential to avoid substantial penalties.