UK and International Tax news

UK Tax Treatment Of US LLCs Update

Thursday 28th February 2013

The Court of Appeal has recently issued its judgment in HMRC v George Anson [2013 EWCA Civ 63] and has upheld the 2011 decision of the Upper Tribunal [UT] in favour of HMRC.

The UT had reversed the 2010 decision of the First Tier Tribunal (FTT) – see our International Tax News item of 28 May 2010 – which had held that 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.

It has been HMRC’s general practice however 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 UT found in favour of HMRC, and held that the LLC was not transparent, the members did not have an interest in the profits of the LLC in any meaningful sense and that the profits on which tax had been paid in the US were the profits of the LLC.  In the UK, however, the members were to be taxed on the distributions from or entitlement under the LLC agreement.  As they were two different sources, the availablity of doulble tax relief under the treaty was not available.

Arden LJ held, in particular, that “the key issue is whether the members of HV [the LLC] were entitled to the profits as they arose. The FTT identified this as a relevant question, but was misled into thinking that the matters to which the allocation of profits was subject – the availability of cash, the absence of claims by HV against the member which could be the subject of set off, a decision by the managing members to create reserves to meet HV’s cash requirements, and the need to withhold profits to meet withholding tax payable by HV- had no substantial effect on the question whether the members were entitled to the profits from the very beginning. Those were very material reservations. The fact was that the profits arose from HV’s trading as principal, and the deductions that could be made from profits before they were allocated were powerful indications that confirmed that the profits did not belong to the members from the moment of their creation. The amount allocated to members was indeed a residual amount after HV had taken the sums that it needed.” Arden LJ concluded by stating that the decision of the UT disclosed no error of law.

The CA refused leave to appeal.

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