UK tax treatment of US limited liability companies

HMRC has issued a statement on the treatment for double tax relief purposes of investments in US limited liability companies (LLCs). This is in response to the recent decision of the Supreme Court in Anson v HMRC.

The facts

Mr Anson was a member of a Delaware limited liability company (LLC) which was treated for US tax purposes as a partnership, with the result that Mr Anson suffered US tax on his share of the profits as they arose. His share of the after-tax income was paid out to him and taxed in the UK. He claimed double tax relief in the UK for the US tax, under the UK-US double tax treaty. HMRC refused the claim on the ground that the US tax did not arise on the same income as the UK tax. Their long-standing practice was to treat an LLC as ‘opaque’ rather than ‘transparent’ for tax purposes, i.e. to treat it as a company rather than a partnership. The position was therefore the same (they considered) as if Mr Anson had received a dividend from a US company; the US tax arose on the profits of the business carried on by the LLC, the UK tax arose on the distribution to Mr Anson from the LLC, and these did not constitute the same income.

The findings of the courts

The First-Tier Tribunal (FTT) found that the combined effect of the Delaware legislation and the agreement made under it between the members of the LLC was that the profits of that entity belonged to the members as they arose, rather than when a subsequent distribution was made. It followed that Mr Anson’s share of the profits of the LLC, and the distribution received by Mr Anson were the same income and that relief was available to him for the US tax.

The Upper Tribunal and the Court of Appeal both found in favour of HMRC, but the Supreme Court restored the decision of the FTT.

HMRC’s statement: double tax relief

HMRC’s recent statement indicates that they see the decision in Anson as particular to its facts. This approach is possible because the decision of the FTT (on which the Supreme Court relied for its understanding of the facts) did not relate only to the interpretation of the Delaware legislation but also of the particular agreement made under it by the members of the LLC.

As a result, the statement indicates 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 distinct from the members] as carrying on a trade or business.”

Where an LLC is owned by individuals who seek to rely on the Anson decision to claim double tax relief, HMRC indicates that it will consider the position on a case-by-case basis. This suggests that in those cases (as in Mr Anson’s case) the details of the agreement between the members will be crucial.

HMRC’s statement: share capital of an LLC

HMRC also indicates that it proposes to continue its existing approach to determining whether a US LLC should be regarded as issuing share capital. The issue here is that under the relevant Delaware legislation a member’s interest in an LLC may be evidenced by a ‘certificate of limited liability company interest’ issued by the LLC, or as otherwise provided in the LLC agreement. If a Delaware LLC issues ‘shares’ in this way and the other factors relating to the company suggest that it has share capital then HMRC will accept that these ‘shares’ may be regarded as ‘ordinary share capital’ for the purpose of UK tax legislation.

Implications of the statement

For individuals in Mr Anson’s position, the availability of double tax relief looks less certain than after the Supreme Court decision; it will not follow automatically from the existence of an LLC but will depend also on the nature of the agreement between the members.

UK companies that are members of LLCs will generally welcome the statement (though they will regret the long period of uncertainty). They will generally prefer the LLC to be treated as a company; first because they will not be liable to UK corporation tax on undistributed profits, and secondly because distributions will normally be exempt from tax in their hands in the same way as other overseas dividends.

For further details please speak to your usual contact at Moore Stephens.

HMRC has issued a statement on the treatment for double tax relief purposes of investments in US limited liability companies (LLCs). This is in response to the recent decision of the Supreme Court in Anson v HMRC.

The facts

Mr Anson was a member of a Delaware limited liability company (LLC) which was treated for US tax purposes as a partnership, with the result that Mr Anson suffered US tax on his share of the profits as they arose. His share of the after-tax income was paid out to him and taxed in the UK. He claimed double tax relief in the UK for the US tax, under the UK-US double tax treaty. HMRC refused the claim on the ground that the US tax did not arise on the same income as the UK tax. Their long-standing practice was to treat an LLC as ‘opaque’ rather than ‘transparent’ for tax purposes, i.e. to treat it as a company rather than a partnership. The position was therefore the same (they considered) as if Mr Anson had received a dividend from a US company; the US tax arose on the profits of the business carried on by the LLC, the UK tax arose on the distribution to Mr Anson from the LLC, and these did not constitute the same income.

The findings of the courts

The First-Tier Tribunal (FTT) found that the combined effect of the Delaware legislation and the agreement made under it between the members of the LLC was that the profits of that entity belonged to the members as they arose, rather than when a subsequent distribution was made. It followed that Mr Anson’s share of the profits of the LLC, and the distribution received by Mr Anson were the same income and that relief was available to him for the US tax.

The Upper Tribunal and the Court of Appeal both found in favour of HMRC, but the Supreme Court restored the decision of the FTT.

HMRC’s statement: double tax relief

HMRC’s recent statement indicates that they see the decision in Anson as particular to its facts. This approach is possible because the decision of the FTT (on which the Supreme Court relied for its understanding of the facts) did not relate only to the interpretation of the Delaware legislation but also of the particular agreement made under it by the members of the LLC.

As a result, the statement indicates 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 distinct from the members] as carrying on a trade or business.”

Where an LLC is owned by individuals who seek to rely on the Anson decision to claim double tax relief, HMRC indicates that it will consider the position on a case-by-case basis. This suggests that in those cases (as in Mr Anson’s case) the details of the agreement between the members will be crucial.

HMRC’s statement: share capital of an LLC

HMRC also indicates that it proposes to continue its existing approach to determining whether a US LLC should be regarded as issuing share capital. The issue here is that under the relevant Delaware legislation a member’s interest in an LLC may be evidenced by a ‘certificate of limited liability company interest’ issued by the LLC, or as otherwise provided in the LLC agreement. If a Delaware LLC issues ‘shares’ in this way and the other factors relating to the company suggest that it has share capital then HMRC will accept that these ‘shares’ may be regarded as ‘ordinary share capital’ for the purpose of UK tax legislation.

Implications of the statement

For individuals in Mr Anson’s position, the availability of double tax relief looks less certain than after the Supreme Court decision; it will not follow automatically from the existence of an LLC but will depend also on the nature of the agreement between the members.

UK companies that are members of LLCs will generally welcome the statement (though they will regret the long period of uncertainty). They will generally prefer the LLC to be treated as a company; first because they will not be liable to UK corporation tax on undistributed profits, and secondly because distributions will normally be exempt from tax in their hands in the same way as other overseas dividends.

For further details please speak to your usual contact at Moore Stephens.

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