UK-US Tax Treaty: What Every British Founder Needs to Know (2026)
The UK-US Double Taxation Convention decoded for startup founders — salary vs dividends optimization, permanent establishment risks, withholding rates, and claiming treaty benefits step by step.
Overview: The UK-US Double Taxation Convention
Treaty Signed
Dividend WHT
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Interest WHT
The Convention between the Government of the United Kingdom of Great Britain and Northern Ireland and the Government of the United States of America for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital Gains was signed on 24 July 2001 and subsequently amended by a protocol signed on 19 July 2002. It entered into force on 31 March 2003.
For UK founders operating Delaware C-Corps, this treaty is your most important financial planning tool. It determines how your income — salary, dividends, capital gains, royalties — is taxed across two jurisdictions, and provides mechanisms to ensure you are never taxed twice on the same income.
Why this matters for founders specifically: Unlike passive investors who earn dividends and interest, founders have complex income patterns — salary from the C-Corp, equity compensation, potential dividends, and the C-Corp's own profits. Each type of income is governed by a different treaty article, and getting the structure wrong can cost tens of thousands of pounds in unnecessary tax.
The treaty covers taxes on income and capital gains levied by both countries. On the UK side, this means income tax, corporation tax, and capital gains tax. On the US side, this covers federal income taxes imposed by the Internal Revenue Code (but not state taxes — an important distinction we will address).
Key Treaty Provisions for Founders
Article 7 — Business Profits
Article 7 establishes the fundamental principle: profits of an enterprise are only taxable in the country where the enterprise is resident, unless it carries on business through a permanent establishment (PE) in the other country.
What this means for UK founders:
- Your Delaware C-Corp is a US entity. Its profits are taxable in the US at the federal corporate rate of 21%. Article 7 does not exempt it from US tax — the C-Corp is a US resident enterprise.
- Your personal UK business activity (consulting, freelancing, advisory work) is taxable in the UK. It does not create a US PE for your personal income unless you have a fixed base of operations in the US.
- Critical nuance: If you personally (as a UK tax resident) perform services for clients through your C-Corp, the C-Corp's profits are still US-taxable. But your personal compensation from the C-Corp is governed by Articles 15 or 16 (employment/directors), not Article 7.
Common mistake: Some founders assume that because they work from London, their C-Corp's profits should be UK-taxable. This is incorrect. The C-Corp is a US entity, and its profits are US-sourced regardless of where the founder physically sits. The PE question applies in the reverse direction — does the UK founder's activity in the UK create a UK PE for the US C-Corp? (See the Permanent Establishment section below.)
US Tax on C-Corp Profits
- 21% federal corporate income tax
- State taxes may also apply (0-11.5%)
- Delaware: no state income tax if no DE operations
- C-Corp files Form 1120 annually
UK Implications (Personal)
- C-Corp profits NOT taxed in UK until distributed
- Dividends/salary are separate (see below)
- CFC rules may apply if UK Ltd is parent
- No UK corporation tax on US C-Corp profits directly
Article 10 — Dividends
When your Delaware C-Corp distributes dividends to you (a UK resident shareholder), the US can withhold tax at source. The treaty reduces the standard 30% withholding rate:
| Scenario | Without Treaty | Treaty Rate | Condition |
|---|---|---|---|
| Individual UK shareholder | 30% | 15% | File W-8BEN with correct treaty claim |
| UK company owns 10%+ of voting stock | 30% | 5% | File W-8BEN-E; 10%+ voting ownership |
| UK pension fund | 30% | 0% | Exempt if pension fund is treaty-qualified |
How to claim the reduced rate:
- Complete Form W-8BEN (individuals) or Form W-8BEN-E (UK entities) and provide to the C-Corp or paying agent.
- Cite Article 10 and the applicable rate (15% or 5%) on the form.
- The form is valid for 3 years from the date of signing (or until a change in circumstances).
- The C-Corp withholds at the treaty rate when making dividend payments and reports on Form 1042-S.
Practical tip: If you are both the sole shareholder and the person running payroll/distributions at the C-Corp, you still need to have a properly completed W-8BEN on file. The IRS expects the withholding agent (your C-Corp) to have documentation supporting the reduced rate. If audited without it, the IRS can assess the full 30% rate plus penalties.
Article 14 — Independent Personal Services (Eliminated)
The original 2001 treaty contained Article 14 covering independent personal services (freelancers, consultants, sole practitioners). However, the 2002 Protocol eliminated Article 14, following the OECD Model Treaty approach.
Income from independent personal services is now governed by Article 7 (Business Profits). This means:
- If you provide consulting services as a sole trader (not through your C-Corp), your income is taxable only in the UK — unless you have a US permanent establishment.
- The old "fixed base" concept from Article 14 no longer applies separately. The PE threshold under Article 7 is the relevant test.
- For most UK founders working through a Delaware C-Corp, this change is immaterial — your income flows through the C-Corp (Article 7 for the entity) and to you as salary (Article 15) or dividends (Article 10).
Article 15 — Employment Income (Dependent Personal Services)
If you pay yourself a salary from your Delaware C-Corp, Article 15 governs the tax treatment. The general rule: employment income is taxable in the country where the employment is exercised.
For a UK founder taking a US salary:
- US taxation: The salary is US-source income because it is paid by a US entity. It is subject to US federal income tax (10-37% depending on bracket) and US payroll taxes (FICA: Social Security 6.2% + Medicare 1.45% = 7.65% employee share, matched by employer).
- UK taxation: As a UK tax resident, you must report worldwide income to HMRC. The US salary goes on your self-assessment tax return (SA100 + SA106). You pay UK income tax on it — but you claim a Foreign Tax Credit for the US tax already paid.
- Result: You effectively pay the higher of the two countries' tax rates, not both added together. Since US federal rates and UK rates are broadly similar, the FTC usually eliminates most or all of the UK tax on the same income.
FICA trap: US payroll taxes (Social Security + Medicare) are NOT income taxes, and you cannot claim a UK Foreign Tax Credit for FICA paid. However, the UK-US Social Security Totalization Agreement may exempt you from US FICA if you remain in the UK NI system. Apply for a Certificate of Coverage (form CF83) from HMRC. This can save you 15.3% of salary (7.65% employee + 7.65% employer share).
| Tax Component | US Treatment | UK Treatment |
|---|---|---|
| Federal/Income Tax | 10-37% (US brackets) | 20-45% (UK brackets) with FTC offset |
| FICA / NI | 15.3% total (unless exempt) | Class 1 NI if on UK payroll; totalization may exempt from one |
| State Tax | Depends on state (Delaware: 0% if no state nexus) | No UK equivalent (already in income tax) |
Article 24 — Relief from Double Taxation
Article 24 is the treaty's core mechanism for preventing double taxation. It establishes a credit method (not exemption method) for both countries:
UK Relief (Article 24(4))
- UK allows credit for US tax paid on income also taxable in UK
- Credit limited to UK tax attributable to that income
- Claim on SA106 (Foreign Income supplementary page)
- Excess US tax cannot reduce UK tax on other income
US Relief (Article 24(1)-(3))
- US allows credit for UK tax paid on income also taxable in US
- Claim on Form 1116 (Foreign Tax Credit)
- Separate limitation categories apply
- Excess credit can carry forward 10 years / back 1 year
How this works in practice for a founder:
Suppose you earn $120,000 salary from your C-Corp. The US withholds $25,000 in federal income tax. The UK also wants to tax this income at, say, $28,000 (UK equivalent rate). Under Article 24, you claim the $25,000 US tax as a credit against the $28,000 UK liability. You pay only the $3,000 difference to HMRC. Total tax: $28,000, not $53,000.
Important limitation: The Foreign Tax Credit in each country is capped at the tax that country would have charged on that income. You cannot use excess US tax credits to offset UK tax on your UK rental income, for example. Each income category is computed separately.
Salary vs Dividends: Tax Optimization for UK Founders
One of the most consequential decisions you will make as a UK founder with a Delaware C-Corp is how to extract money from the company. The three primary options — retaining earnings, taking salary, or distributing dividends — each have dramatically different tax consequences across both jurisdictions. Below we model three common scenarios on $200,000 of C-Corp pre-tax profits.
Scenario 1: Retain All Earnings in the C-Corp ($0 Personal Income)
The founder takes no salary and no dividends. All profits stay inside the C-Corp.
Pros: Lowest immediate tax. Capital stays in the business for growth. No personal payroll tax burden.
Cons: You have $0 personal income. Accumulated Earnings Tax risk if IRS determines earnings are retained beyond reasonable business needs (currently 20% penalty). Not sustainable long-term — the IRS expects a "reasonable salary" for shareholder-employees who provide services.
Scenario 2: Reasonable Salary of $100,000 + Retain $100,000
The founder takes a $100,000 salary (deductible by the C-Corp) and retains the remaining profits.
Pros: Salary is deductible for the C-Corp, reducing corporate tax. Builds Social Security credits in the US. Satisfies "reasonable compensation" requirement.
Cons: FICA adds 15.3% payroll tax on salary (split employee/employer). Higher overall rate than pure retention. *UK differential depends on exact bracket; shown is approximate difference after FTC.
Optimization: If you obtain a Certificate of Coverage under the UK-US Totalization Agreement, you can be exempt from US FICA entirely — saving $15,300 in this scenario. You would pay UK NI instead (typically lower).
Scenario 3: $60,000 Salary + $80,000 Dividend Distribution
The founder takes a modest salary and distributes remaining after-tax profits as dividends.
Key insight: Dividends are the most tax-inefficient extraction method for C-Corp founders because of double taxation — the C-Corp pays 21% corporate tax on profits, then you pay personal tax on the dividend (US withholding + UK dividend tax). The combined effective rate on the dividend portion alone exceeds 45%. Dividends should generally be a last resort for UK founders, used only when profits significantly exceed reasonable salary levels.
Comparison Summary
| Scenario | Personal Cash | Total Tax | Effective Rate | Retained in Corp |
|---|---|---|---|---|
| 1: Retain all | $0 | $42,000 | 21.0% | $158,000 |
| 2: $100K salary | $72,350 | $47,044 | 23.5% | $72,956 |
| 3: $60K salary + $80K div | $114,810 | $69,626 | 34.8% | $26,974 |
Recommended approach for most early-stage UK founders: Pay yourself a reasonable salary (the minimum the IRS would accept for your role — typically $60,000-$120,000 for a tech startup CEO). Retain remaining profits in the C-Corp for reinvestment. Avoid dividends until you have a specific reason (e.g., the company is highly profitable and you need personal liquidity). Apply for a Totalization Agreement Certificate of Coverage to minimize payroll tax.
Permanent Establishment Risks
If you are a UK-based founder running a Delaware C-Corp remotely from London, one of the most critical treaty questions is: does your UK activity create a "permanent establishment" (PE) for the US C-Corp in the UK? If it does, HMRC can tax a portion of the C-Corp's profits in the UK — in addition to the US corporate tax already owed.
What Creates a UK PE for Your US C-Corp?
Under Article 5 of the treaty, a PE exists when an enterprise has a fixed place of business through which the business is wholly or partly carried on. This includes:
- A place of management, a branch, an office, a factory, a workshop
- A building site or construction project lasting more than 12 months
The "Dependent Agent" PE (the real risk for founders):
Even without a fixed office in the UK, a PE can arise if a person in the UK habitually exercises authority to conclude contracts in the name of the enterprise. This is the provision that directly threatens UK-based C-Corp founders.
Higher PE Risk
- Founder is an employee of the C-Corp
- Founder signs contracts on behalf of C-Corp from UK
- UK home office is the C-Corp's primary operating base
- Founder negotiates and closes deals from UK
- C-Corp has no US employees or physical presence
Lower PE Risk
- Founder is director/shareholder only (not employee)
- Contracts are concluded in the US (e.g., by US-based co-founder)
- C-Corp has real US substance (employees, office)
- UK activity is preparatory/auxiliary only
- Founder acts in independent capacity as director
HMRC is increasingly scrutinizing this area. Post-Brexit, HMRC has added resources to investigate cross-border arrangements. If your Delaware C-Corp's only human being is you, sitting in London, signing customer contracts and managing all operations, HMRC has a strong argument that the C-Corp has a UK PE. The consequences: UK corporation tax (25%) on profits attributable to UK activity, plus potential penalties and interest.
Mitigation Strategies
If you are operating your C-Corp primarily from the UK, consider these strategies to reduce PE risk:
- Establish genuine US substance. Hire a US-based employee or contractor. Have a US physical address (not just a registered agent). Conduct board meetings in the US (at least some). The more real US activity, the weaker HMRC's PE argument.
- Contract execution in the US. Ensure that customer contracts, vendor agreements, and other binding documents are signed by someone in the US, or that the final authorization step occurs in the US. Use DocuSign workflows that route final signature to a US-based person.
- Director vs. employee distinction. If you structure your role as a non-executive director of the C-Corp (rather than an employee-CEO), the "dependent agent" PE test is harder for HMRC to meet. Directors acting in their capacity as board members are generally not treated as agents of the company for PE purposes.
- Preparatory/auxiliary exception. Article 5(4) of the treaty provides exceptions for activities that are preparatory or auxiliary in character. If your UK work is limited to research, planning, or coordination — with revenue-generating activity in the US — this exception may apply.
- Maintain a UK Ltd with a service agreement. Have a UK Ltd that employs you and provides management services to the C-Corp under an intercompany agreement. The UK Ltd pays UK corporation tax on its service fees. This "ring-fences" the UK activity and provides HMRC with a UK-taxable entity, reducing their incentive to pursue a PE argument against the C-Corp.
How to Claim Treaty Benefits
Treaty benefits are not automatic. You must affirmatively claim them using the correct forms and documentation. Failure to do so means you pay the higher default rates.
US-Side Claims: W-8BEN and W-8BEN-E
Form W-8BEN (for individuals):
You file this with any US payer — your C-Corp, a US bank, a brokerage — to establish that you are a UK tax resident claiming treaty benefits.
- Complete Part I with your name, UK address, and UK tax identification number (your UTR — Unique Taxpayer Reference, or National Insurance number).
- In Part II (Claim of Tax Treaty Benefits), check that you are a resident of the United Kingdom. Enter the treaty article (e.g., "Article 10" for dividends) and the rate you are claiming (e.g., "15%").
- In the special rates and conditions section, provide the specific paragraph (e.g., "Article 10(2)(b)") and explain why you meet the conditions (e.g., "Beneficial owner of dividends; UK tax resident").
- Sign and date. Provide to the withholding agent (your C-Corp, bank, etc.). The form is valid for 3 calendar years unless circumstances change.
Form W-8BEN-E (for UK entities):
If your UK Ltd receives dividends, interest, or royalties from the US C-Corp, the UK Ltd files W-8BEN-E. This is a longer form with additional entity classification questions.
- Part I: Entity information (UK Ltd name, UK address, UK company registration number, UK UTR)
- Part III: Claim of Tax Treaty Benefits — cite Article 10 (dividends) or Article 11 (interest), applicable rate, and confirm the entity is a "resident" of the UK for treaty purposes
- Ensure the UK Ltd meets the "limitation on benefits" (LOB) test under Article 23 — most genuine UK operating companies will qualify under the "active trade or business" or "publicly traded" tests
UK-Side Claims: Tax Residency Documentation
To support your treaty claims, maintain documentation of your UK tax residency:
Key UK Documents
- SA302 — Tax Calculation from HMRC (proves UK filing)
- P85 — If you left the UK (leaving certificate)
- Certificate of UK Tax Residence — Request from HMRC for treaty purposes
- Self-assessment tax returns showing UK residency claimed
How to Obtain a Certificate of Residence
- Apply online via HMRC portal or by post
- Processing takes 2-4 weeks typically
- Specify the treaty country (United States) and tax year
- Free of charge; valid for the tax year specified
Statutory Residence Test (SRT): Your UK tax residency is determined by the SRT under Finance Act 2013. If you spend 183+ days in the UK in a tax year, you are automatically UK resident. If you have fewer days, the "sufficient ties" test may still make you resident. Keep a careful log of your UK/US travel days — this affects not just treaty benefits but your entire tax position.
Foreign Tax Credit: Avoiding Double Tax in Practice
The Foreign Tax Credit (FTC) is the mechanism that actually prevents you from paying tax twice on the same income. Both the UK and US have FTC systems, but they work differently.
Claiming FTC in the UK (SA106)
On your UK self-assessment tax return, you report foreign income and claim credit for foreign tax paid on the SA106 supplementary page (Foreign Income).
Step-by-step process:
- Report the gross income in the relevant section of SA106:
- Section 2: Employment income (your US salary, in GBP using HMRC exchange rates)
- Section 4: Dividends (gross dividend amount before US withholding, in GBP)
- Section 3: Interest income (if applicable)
- In Section 1 of SA106, tick "Yes" to claim Double Taxation Relief. Enter the country (United States), the type of income, the foreign tax paid (converted to GBP at HMRC rates), and the corresponding UK tax on that income.
- The credit is limited to the UK tax attributable to that foreign income. If you paid $25,000 US tax on $120,000 salary, but the UK tax on that salary (after personal allowance) would be $22,000, you can only claim a $22,000 credit — the $3,000 excess is not refundable (but may be creditable in the US).
Currency conversion: Use HMRC's published exchange rates for the relevant tax year. These are published annually and are the only rates HMRC accepts. Do not use Google, XE, or your bank's rate. The rates are available at gov.uk/government/collections/exchange-rates-for-customs-and-vat.
Claiming FTC in the US (Form 1116)
If you are also filing a US personal tax return (e.g., because you have US-source income or have elected to be treated as a US tax resident for certain purposes), you can claim UK tax paid as a credit on Form 1116.
Key features of the US FTC:
- Separate limitation categories: General category income, passive category income, and other categories. Salary is "general category"; dividends are typically "passive category." Credits in one category cannot offset tax in another.
- Carry-forward: Excess foreign tax credits can be carried forward for 10 years and carried back 1 year. This is more generous than the UK system.
- Election to deduct instead: You can elect to deduct foreign taxes as an itemized deduction rather than claiming a credit. This is rarely beneficial but may be in unusual situations.
Excess Credit and Timing Issues
Because the US and UK tax years do not align (US: calendar year; UK: 6 April to 5 April), there can be timing mismatches:
- US taxes are filed by 15 April for the preceding calendar year. UK taxes are filed by 31 January for the tax year ending the previous 5 April.
- Recommended order: File your US taxes first (they are due earlier and cover a calendar year). Then use the actual US tax paid when completing your UK SA106. This avoids having to estimate the FTC and amend later.
- If the UK return is due first: You can estimate the US tax credit and file the UK return, then amend if the actual US tax differs. Or request a UK filing extension (HMRC may grant additional time for international filers).
Excess credit rules:
| Feature | UK (SA106) | US (Form 1116) |
|---|---|---|
| Carry-forward | No carry-forward of excess FTC | 10-year carry-forward |
| Carry-back | No carry-back | 1-year carry-back |
| Excess treatment | Lost (cannot exceed UK tax on that income) | Carried to other years |
| Category limits | Per-income-source basis | Separate basket limitations |
Planning point: Because the UK does not allow carry-forward of excess FTC, it is important to time your income extraction to avoid situations where US tax significantly exceeds the UK tax on that income. If you are in a lower UK bracket but higher US bracket on certain income, you may permanently lose the excess credit in the UK.
Business Entity Tax Calculator
Use this calculator to compare tax outcomes across different entity structures and compensation strategies:
Frequently Asked Questions
Do I need to file a US personal tax return as a UK founder?
It depends. If you receive a salary from the US C-Corp, you may need to file Form 1040-NR (US Nonresident Alien Income Tax Return) to report that US-source employment income. However, if you work entirely from the UK and your salary is not for services performed in the US, there is an argument that the income is not US-source for personal tax purposes (even though it is paid by a US entity). This is a grey area — consult a US tax adviser. Regardless, the C-Corp itself must file Form 1120 and, if foreign-owned, Form 5472.
Can I use the treaty to avoid all US tax on my C-Corp's profits?
No. The treaty does not exempt a US corporation from US corporate tax. Your Delaware C-Corp is a US tax resident, and its profits are subject to 21% federal corporate tax regardless of where its shareholders reside. The treaty helps with personal taxes — reducing withholding on dividends, preventing double taxation of salary, and providing foreign tax credits. But the corporate-level US tax is not affected by the treaty.
What if I spend significant time in both the UK and US?
If you are tax resident in both countries (e.g., 183+ days in the UK and meet the substantial presence test in the US), the treaty's "tie-breaker" rules in Article 4 determine your residence for treaty purposes. The tie-breaker considers: permanent home, centre of vital interests, habitual abode, and nationality, in that order. If you are treated as a UK resident under the tie-breaker, you claim FTC for US taxes paid. If treated as US resident, you claim FTC for UK taxes. In either case, keep meticulous travel records — the stakes are high if your residency is contested by either tax authority.
Does the treaty cover state taxes?
No. The UK-US treaty covers only federal income taxes. US state taxes (e.g., California, New York) are not covered by the treaty. Some states conform to federal treaty rules, but others do not. If your C-Corp has nexus in a state with income tax, the state may tax the C-Corp's profits regardless of treaty provisions. HMRC will generally allow a Foreign Tax Credit for US state taxes paid, as they are "taxes on income" under UK domestic law — but this is claimed in addition to the federal FTC and adds complexity to your SA106 filing.
How do I handle stock options and equity compensation under the treaty?
Stock options granted through employment with a US C-Corp are complex under the treaty. Generally: the gain on exercise of stock options is treated as employment income (Article 15), taxable in the country where the employment was exercised during the vesting period. If you vested entirely while working in the UK, the gain is primarily UK-taxable. If you vested partly in the US, the gain is apportioned. You would claim FTC for any US tax on the portion attributable to US-based work. For restricted stock with an 83(b) election, the tax treatment depends on the election date and whether the UK recognizes the US election. The UK has its own employment-related securities rules (Part 7, ITEPA 2003) that may apply independently. See our Equity & Vesting guide for details.
Need Help Navigating UK-US Tax Treaty Provisions?
Cross-border tax structuring for founders requires expertise in both US and UK tax law. Schedule a consultation to discuss your specific situation, salary vs. dividend optimization, and PE risk mitigation.
Schedule a ConsultationSergei Tokmakov, Esq. — California Bar #279869