In an unexpected decision, the United Kingdom Supreme Court has held in Anson v Commissioners for Her Majesty’s Revenue & Customs  UKSC 144 that a UK member of a Delaware limited liability company (“LLC”) was entitled to relief under the UK/US double taxation treaty (the “Treaty”) for United States tax paid on the profits derived from the LLC. The ruling reverses the decisions of the Upper Tribunal and the Court of Appeal and upholds the original First Tier Tribunal decision. This Alert summarises the key points of the decision and will be followed by a more detailed Alert on the potential implications of the judgment.
Mr. Anson, a UK resident individual, was a member of a Delaware LLC that carried on business in the United States. Since a Delaware LLC is transparent for U.S. fiscal purposes, he was taxed in the United States on his share of the profits whether or not distributed. The UK also sought to tax Mr. Anson on his distributed profits from the LLC by treating them as distributions from a company. Mr. Anson had paid U.S. tax at around 45 percent and the UK tax was 22 percent on the same income (at the rates prevailing at the time). This resulted in potential double taxation and an effective tax rate of 67 percent.
Article 23 of the 1975 UK/US Double Taxation Convention states that any U.S. tax paid shall be credited against “any United Kingdom tax computed by reference to the same profits or income by reference to which the United States tax is computed.” An almost identical provision is found in Article 24 of the 2001 UK/US Treaty. To comply with this, UK law provides for relief under its domestic credits system for tax paid “by reference to the same profits or income.” Thus, the key issue was whether the UK and the United States treated the tax imposed on the LLC profits as being by reference to the same profits or income.
Both the Upper Tribunal and the Court of Appeal placed considerable emphasis on the concept of UK law on fiscal transparency. They found that Mr. Anson did not have a right to the profits of the LLC as they arose and that, accordingly, the profits taxed in the UK were those derived from the LLC itself and not the assets of the LLC.
On preliminary review, the Supreme Court has appeared to place greater emphasis upon international concepts regarding treaty relief. This decision could have significant impact in terms of global structuring and go beyond application to U.S. LLCs. We are still in the process of analysing the judgment, and as noted above, a further Alert will follow in due course. For now, UK members of U.S. LLCs may want to review their position, both past and present, on the assumption that they should be entitled to relief under the UK/US double taxation treaty.