A recent decision of the UK Supreme Court cast doubt on the tax treatment of US limited liability companies but the UK tax authorities have confirmed that the decision is confined to the facts of the case.
In the case of Anson v HMRC, the Supreme Court ruled that the profits of a Delaware LLC belonged to members as they arose and hence the UK resident LLC member was taxed on the same profits in the UK as had been taxed in the US and was therefore entitled to double tax relief.
The Supreme Court reinstated the decision of the UK First-Tier Tribunal that had found in favour of the UK member, namely that on a proper construction of Delaware law and the LLC's Operating Agreement, the members of the LLC had an interest in the profits of the LLC as they arose, and not only when those profits were distributed to them e.g.in the form of a dividend. This was contrary to the generally accepted view and created significant uncertainty for structures involving US LLCs.
HMRC practice announcement
HMRC have announced that the decision was specific to the facts of the case before the court. As a result, where US LLCs have been treated as companies within a group structure, HMRC will continue to treat the US LLCs as companies. Where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLC as carrying on a trade or business
In many respects, HMRC's view is welcome as it might be used as a basis to continue as before. In particular, many UK resident members of US LLCs (and similar entities) will want to continue to take the position they should not be subject to UK tax on the LLC's profits as they are earned.. Second, the decision means that HMRC are unlikely to change their view of when a US LLC can be a member of a group for UK tax purposes.
However, some questions remain on whether HMRC's interpretation is giving effect to the judgement such that it may be necessary for some groups to assess whether steps need to be taken to give further certainty on their specific position.
Issued share capital
HMRC also confirmed that they will continue their existing approach to determining whether a US LLC should be regarded as issuing share capital. This has been that LLCs are capable of having issued share capital, which is relevant for determining whether an LLC is a member of a group of companies for UK tax purposes, particularly in circumstances where a Delaware LLC has issued certificates to its members evidencing their membership interests. This confirmation is welcome.