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UK Tax Law Update

5 september 2011



For additional information contact:

Nick Thornton

Will Gay

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.