Entity
status of US LLCs for UK tax purposes: as you were, LLCs
opaque after all! 
In
February 2010 the UK’s First-Tier Tribunal ruled that a
Delaware Limited Liability Company (“LLC”) was a “transparent”
entity for UK tax purposes (in an anonymised decision referred
to as Mr
Swift). This was contrary to the general
understanding at the time, and to HM Revenue & Customs
practice (which continued unchanged). Now, on appeal, the
decision has been reversed by the Upper Tribunal (the taxpayer
being unmasked as George
Anson), which confirms the long-accepted position
that in general LLCs were considered tax-opaque for UK
purposes. Most are welcoming this
outcome.
The
case concerns the ability of a UK resident member of an LLC to
obtain double tax relief from UK taxes for US tax suffered on
the profits of the LLC. Convention suggested that this was not
possible due to the US tax being assessed on members on their
share of the LLC’s profit (LLCs being, subject to election,
tax transparent for federal tax purposes), whereas the UK tax
was assessed on members on distributions from the LLC (based
on opaque tax treatment for an LLC). For double tax relief to
apply the tax had to be assessed by both jurisdictions on the
same profits or income.
In
the original decision, the crucial finding had been that the
LLC’s members had an entitlement to the LLC’s profits as they
arose. If correct this would have enabled double tax relief to
be claimed in the UK, as the UK tax system should then
have been taxing members of the LLC on the LLC’s profits as
they arose, as was the case with US taxes, and not on
subsequent distributions from the LLC instead. However, the
Upper Tribunal found this to be incorrect. Firstly it argued
that “profits” (as effectively an accounting concept) cannot
be “owned” as such, but rather that it is assets (which may to
an extent represent profits) which are owned. As the expert
evidence from both parties was that the assets of the LLC were
owned by the LLC and not the members, this lead to the
conclusion that the members were not entitled to the profits
as they arose in the necessary sense. As such, the UK tax
system should tax members on distributions from the LLC only,
and not profits as they arise, so double tax relief would not
be available. The LLC was found to be opaque for UK tax
purposes.
Although in the particular matter at issue the taxpayer
lost out because of this finding, in general terms this will
be greeted by taxpayers with relief, because an over-turning
of the accepted position in relation to an LLC’s tax status
was likely to have caused significant uncertainty for many
existing structures. Nevertheless, it should be noted that at
the time of writing it is not yet clear whether there will be
a further appeal against the decision, so the uncertainty
continues to that extent. Also, although the decision provides
considerable comfort, the UK tax status of any particular LLC
will always need to be considered on its own particular
facts.
The
First-Tier Tribunal had also indicated that the LLC under
consideration did not have “share capital” for UK tax
purposes. This was a potentially important finding, with
particular relevance to the ability of an LLC to be a member
of a corporate grouping for various intra-group tax reliefs.
Unfortunately this aspect has not been further clarified by
the Upper Tribunal, although again HMRC’s practice on the
point, which runs largely contrary to the First-Tier
decision, has not been changed.
If you would like to know more
Nick Thornton (+44 20 7862 4612) or Will Gay
(+44 20 7862 4762) of Orrick's London tax team will be pleased
to
help. |
