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socrateaser
socrateaser, Attorney
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Question ABC Ltd (The Company) is a UK based Specialist Company,

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Question:
ABC Ltd (The Company) is a UK based Specialist Company, carrying out business by supplying services and skills to, agents, managers and companies world wide.
DEF Inc USA (The Agent) is completely independent of "The Company" and is a US based Agent and Production Company working in the US with national and International Companies throughout the world.
No contract of exclusivity, economic, legal or otherwise exists between "The Company" and "The Agent", and both parties operate independently except when. "The Company" accepts to work on business commissioned by or for The Agent.
A Director of "The Company" is one of several employees and contracted individuals who provide their skills and services on behalf of "The Company" wherever the the contract requires.
How, where and when the US Tax Resident Director receives any, re-embursement/dividend etc has yet to be decided.
"The Company" signs contracts, invoices for work carried out, pays all the bills and negotiates every contract with or through "The Agent"
"The Agent" requests "The Company" to carry out various creative activities for clients obtained by "The Agent". An employee of "The Company" is sent to the US to carry out the various activities. "The Company" pays all of the employees expenses, negotiates each contract offered by "The Agent" and provides all of the equipment required to carry out the duties. "The Company" then invoices "The Agent" and in some cases, other clients, for work carried out.
"The Company" also requires the employee to carry out various activities in the UK, France and elsewhere. It is however clear that the employee is and will continue to be, US Tax Resident as long as contracts continue to be forthcoming and he is required to reside in the US.
"The Company" has rented accommodation in the US and other places for use by employees and hired expertise etc involved in honoring the various contracts.
Questions.
What is the tax position of all involved and who will be liable for Tax and where?
Will "The Company" be liable to pay tax in the UK or US. Will all funds, payments etc, received in the UK from the US, be treated as UK taxable income?
Will the Director, who is also an employee and is US tax resident, be liable to pay tax of any kind in the UK or US, other than tax on any salary he receives whilst in the US?
Submitted: 7 years ago.
Category: Business Law
Expert:  socrateaser replied 7 years ago.

Based on your description of facts, the Company is an independent contractor because it controls the manner an method by which its employees carry out their job duties on behalf of the Agent. If the Company is being paid for services rendered inside the USA, by employing a U.S. permanent resident, then the Company is legally subject to pay U.S. Federal and State employment taxes, and income taxes based on its revenues generated from U.S. sources, because it has a continuous presence and carrying on business inside the USA through its employee.

 

The Agent apparently has no presence in the UK an is only purchasing services, so it is not subject to UK taxes.

 

Hope this helps.

 

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Customer: replied 7 years ago.
Thank you for that. Just a couple of follow up questions please.

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If it does transpire that there is a US permanent establishment;

 

1. Will the US Tax Resident employee still be treated as an employee and only pay tax on any salary he receives from the Company?

2. Will the various legitimate business expenses incurred by the Company in carrying out its operations for, travel, accommodation in the UK, US and elsewhere, still be allowable?

 

3. Will the UK Company have to pay tax on its world wide income to the IRS? If not, how would the Companies income be apportioned?

 

4. Would any service agreement that the employee had with the UK Company be recognised by the US Tax authorities?

Expert:  socrateaser replied 7 years ago.

1. Maybe. If he has an ownership interest in a foreign legal entity, then he must identify it and report any nonemployee income received on his U.S. 1040 Personal Income Tax Return.

 

2. Yes. The employee can provide receipts to the Company for reimbursement, and the Company can deduct against their income tax obligation.

 

3. No. The Company is only liable in the U.S. for income derived from its U.S. Sources.

 

 

Customer: replied 7 years ago.
Last question. It is No 4 on my previous list. It must have got lost on the way to you.

Thank you.
Expert:  socrateaser replied 7 years ago.

4. Can you narrow the terms, "any service agreement?" I don't understand the question.

Customer: replied 7 years ago.

Sorry. I hope this explains.

4.

The employee is also a Director of the UK Company. He has signed a contract (Service Agreement) with the Company giving the Company exclusive rights to his services also ownership of all work performed or produced by him. The employee has also signed a Assignation of Right to Income agreement with the Company giving the Company the rights to all revenue/income generated or due to the employee and the company has an offshore company that receives that revenue.


2. Will the various legitimate business expenses incurred by the Company in carrying out its operations for, travel, accommodation in the UK, US and elsewhere, still be allowable? As The Company pays all expenses will it be able to claim all accommodation costs. I understand that, if the employee was responsible for his accommodation, as a resident there would be limitations on what he could claim for.



Expert:  socrateaser replied 7 years ago.

4. Fringe benefit deductions are extremely complicated. See IRS Pub. 15-B, Table 201, page 5, for an overview of every possible issue.

 

In general, expenses incurred for the benefit of the employer are deductable (hotel, travel: yes; meals: no).

Customer: replied 7 years ago.

Last one.


Sorry if I have confused you. Question 4 relates to something other than "fringe benefits"

How is the situation, which has been ongoing for some time affected? Will those agreements not be recognised by the IRS

4. The employee is also a Director of the UK Company. He has signed a contract (Service Agreement) with the Company giving the Company exclusive rights to his services also ownership of all work performed or produced by him. The employee has also signed a Assignation of Right to Income agreement with the Company giving the Company the rights to all revenue/income generated or due to the employee and the company has an offshore company that receives the revenue.

Expert:  socrateaser replied 7 years ago.

You are describing a relationship that violates public policy in every U.S. jurisdiction. Under U.S. Law a person is either an independent contractor or an employee. The principal factor is whether or not the worker retains the right to control the manner and method by which he or she carries out the services to the contracting party.

 

If your director has effectively given up all control, then he is an employee -- period. That means all of his expenses are fringe benefits of the employer (Company) as a matter of law.

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