UK and International Tax news
UK Tax Treatment Of Delaware LLC Update
Wednesday 8th July 2015
The Supreme Court [SC] has recently heard the taxpayer’s appeal against the Court of Appeal decision in the case of Anson v HMRC [UKSC 44] which concerned the entitlement to double tax relief on income remitted to the UK from the US.
The FTT had previously held the US LLC should be treated as transparent for UK tax purposes and that the profits taxed on the UK members as they arose rather than as they were distributed. Where the UK members are taxed in both jurisdictions on the same income, double tax relief should be available for US tax paid.
The Upper Tribunal allowed the Commissioners appeal and the Court of Appeal dismissed the taxpayer’s appeal.
It has been HMRC’s general practice to tax a UK resident member of an LLC on the profits of the LLC only if and when those profits are distributed by the LLC to its members. In particular, it has treated a Delaware LLC as having ‘ordinary share capital’ for the purposes of s.832 TA88. A consequence of this treatment is that any tax paid in the US on the profits of the LLC is available for relief against UK tax only as underlying tax and only to a UK company which controls, directly or indirectly, at least 10% of the voting power in the LLC.
The SC has unanimously allowed Mr Anson’s appeal, and Lord Reed held in particular that “Mr Anson was entitled to the share of the profits allocated to him, rather than receiving a transfer of profits previously vested (in some sense) in the LLC. It follows that his “income arising” in the US was his share of the profits. That is the income liable to tax under UK law, to the extent that it is remitted to the UK. Mr Anson’s liability to UK tax is therefore computed by reference to the same income as was taxed in the US. Accordingly he qualifies for double taxation relief under article 23(2)(a)”.
This decision is of significance to corporate and non corporate groups with US LLC’s as in effect the decision confirms that the LLCs should be treated as transparent for UK tax purposes. This is contrary to HMRC’s practice noted above although it will be important to review the terms of any particular LLC when assessing whether the LLC can be treated as transparent.
If you would like to discuss the implications of this case, please contact Keith Rushen on +44 (0)20 7486 2378.Contact Us