HMRC approach to double taxation relief and US companies mostly unchanged after Supreme Court decision
The UK’s tax treatment of US limited liability companies (LLCs) will remain mostly unchanged despite a recent Supreme Court decision in favour of the taxpayer, HM Revenue and Customs (HMRC) has confirmed.25 Sep 2015
HMRC said that the decision of the UK’s highest court in favour of George Anson, a UK resident but non-domiciled member of an LLC based in Delaware, was “specific to the facts found in the case”. Individuals claiming double taxation relief based on the decision would be “considered on a case by case basis”, it said.
The guidance is of relevance to businesses, charities, pension funds and their advisers that make use of US LLCs in group and commercial structures, HMRC said.
Tax expert Catherine Robins of Pinsent Masons, the law firm behind Out-Law.com, said that the court ruling had “caused considerable uncertainty” over the UK tax status of LLCs and affected corporate groups would be “relieved that HMRC has taken a narrow interpretation of the case”.
“For some, a change of tax status could have had serious adverse implications and could have meant that the dividend exemption and the substantial shareholdings exemption would not be available,” she said. “The briefing setting out HMRC’s views will be particularly welcome to companies with a year end approaching, which were having to consider carefully whether they could justify filing their returns on the basis that their circumstances could be distinguished from the facts in the Anson case.”
HMRC had traditionally treated US LLCs as ‘tax opaque’; meaning that they were treated like companies and UK tax only became payable when the LLC’s profits were distributed by way of dividend, and that corporate recipients were usually exempt from paying tax on dividends. However, in July, the Supreme Court ruled that Anson, who was subject to both US and UK tax was entitled to double tax relief from UK income tax on income derived from his share of the profits made by Delaware-based HarbourVest Partners, an LLC of which he was a member. This effectively treated the LLC as tax transparent.
Anson was resident but not domiciled in the UK for tax purposes, which meant that he was liable to pay UK income tax on his UK source income and on any foreign income transferred or ‘remitted’ to the UK. He was non-resident in the US for US tax purposes, but was liable to pay US federal and state taxes on his US source income. The LLC was classified as a partnership for US tax purposes, and Anson was liable to pay US federal and state taxes on his share of the profits.
After Anson paid US tax on his share of the profits, he transferred the remaining money to the UK. Anson believed that he was eligible for double taxation relief, but HMRC argued that he had to pay income tax on the money because it had been taxed in the US the income of the LLC, not of Anson. The Supreme Court backed the findings of the first-tier tax tribunal (FTT); which had found that based on Delaware law the members of the LLC automatically became entitled to their share of the profits generated by its business as they arose, prior to and independently of any subsequent distribution.
In its briefing note, HMRC said that the FTT’s findings in the case were based on both Delaware’s own laws relating to LLCs and the LLC agreement in this particular case.
“This means that where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies, and where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLC as carrying on a trade or business,” it said. “HMRC also proposes to continue its existing approach to determining whether a US LLC should be regarded as issuing share capital.”
