A 2015 tax case involves the tax treatment of income remitted to the UK from a member of a Delaware LLC. Should it be taxed as partnership profits or dividends in the UK? HMRC's practice was to treat these LLCs as if they are companies.

A Limited Liability Company (LLC) formed in the US state of Delaware is taxed transparently in the US so that its profits are taxed as the income of their members. In the UK these LLCs are treated as companies. This difference could create a tax advantage or a disadvantage depending on the interaction of Double Taxation Relief (DTR).

Delaware companies have a variety of other features. They are not subject to tax in the state of Delaware. The state also has a separate legal system and above all secrecy; company ownership is not publicly available for these corporations.

Tax case: George Anson v HMRC

Mr Anson was a participant in a Delaware LLC. He was at the relevant time non-domiciled in the UK and so was taxed on remittances. He remitted his income from the LLC. 

After making a discovery, HMRC sought to assess Mr Anson for tax on the basis that the income remitted from the LLC was taxable as a dividend. HMRC contended that in English law the LLC fell to be treated as 'opaque' so Mr Anson was not entitled to DTR for various federal taxes paid personally.

The First Tier Tribunal (FTT) thought hard about the conundrum and found that members of an LLC have interests akin to the interests of a Scottish partner, although both Mr Anson's barrister and HMRC had difficulty in deciding what the First Tier really thought.

Mr Justice Mann sitting at the Upper Tier Tribunal unpicked the FTT's decision and found that he did not agree. He thought that unlike a partnership the members of an LLC do not have an interest in its profits in 'any meaningful sense' and so the profits on which tax has been paid in the US are the profits of the LLC. He decided that Mr Anson is taxed on something different in the UK which were distributions from (or entitlement under) the LLC agreement. 

Supreme Court decision

The Supreme Court stated that the ‘only relevant question’ was whether the income being taxed in both jurisdictions were one and the same. If so, then relief should be allowed. The Court found that the income referenced was the same and so relief should be allowed. It cited the fact that Mr Anson was entitled to and so taxed on the profits accruing to him in accordance with the LLC agreement.

The LLC was therefore held to be ‘fiscally transparent’ for UK tax purposes.  

Commentary

The decision is at odds with established HMRC practice in respect of US (Delaware) LLCs and could have implications that practitioners should be aware of:

  • Clients with income from similar entities may be entitled to double tax relief.
  • Precedent may indicate a shift toward claiming relief first and awaiting HMRC challenge (this case sets a new precedent).
  • Wider reaching implications where tax treatment in a foreign jurisdiction is inconsistent with legal entity: focus on question of whether profits taxed are identical may indicate relief is due.

Allan Cinnamon, a cross border expert, writing in Tax Adviser magazine notes that there may be other entities which have similarly been classed previously as opaque by HMRC, including LLCs in Anguilla, Isle of Man and Russia. Some other (non-Delaware) US LLCs may be taxed opaquely by their states and so tax credits may not be available.

HMRC Customs Brief 15

Following the decision in Anson HMRC published Customs Brief 15 which stated that the facts of the Anson case were unique and that they would continue treating Delaware LLC's as opaque for UK tax purposes.  Anyone seeking to rely on the Anson decision would need to be considered on a case by case basis.

External link

George Anson v HMRC [2015] UKSC 44

HMRC Customs Brief 15

 

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