IRS Rules on Creditability of U.K. Special Remittance Tax
The IRS issued Revenue Ruling 2011-19 ruling that U.S. individuals resident in the United Kingdom who elect to pay the £30,000 levy for non-domiciliaries may claim a foreign tax credit for that amount. The IRS determined that the remittance basis charge (RBC) applied to long-term non-domiciliaries -- those resident in the U.K. for seven of the last nine years but who continue to claim foreign domicile -- falls under the code section 901 definition of a creditable foreign income tax.
Under changes introduced by the U.K. in 2008, long-term non-domiciliaries must pay the additional charge to remain within the U.K. remittance-based tax regime. Under the remittance tax regime, a non-dom is not taxed on foreign-source income that remains offshore but will instead be taxed only on income remitted to the U.K. and on U.K.-source income.
Uncertainty surrounding the treatment of the tax under U.S. rules raised the specter of double taxation for U.S. nationals who claimed U.K. non-dom status. Because of the unique nature of the charge, it was not clear whether it would be creditable under reg. section 901-2(a)(1), which requires that "the predominant character of that tax is that of an income tax in the U.S. sense."
In its analysis, the IRS determined that the remittance basis charge and remittance basis taxation are a single tax, which it terms the long-term non-domiciliary levy, for section 901 purposes.
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