On 1 July 2015, the Supreme Court (in Anson v HMRC4) held that a taxpayer was entitled to treaty relief on his share of a Delaware LLC’s profits. This casts doubt on HMRC’s published position (though each case must be judged on its own facts).
The taxpayer, a UK “non-domiciled” individual, was a member of a Delaware LLC. For US tax purposes, each member (rather than the LLC itself) was subjected to US tax on their share of the LLC’s profits (whether distributed or not).
The relevant article of the applicable US/UK double tax treaty stated that: “[US tax] on profits or income from sources within the United States ... shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits or income by reference to which the United States tax is computed.”
The taxpayer remitted his gross profit share to the UK, and claimed foreign tax credit in the UK. HMRC denied such foreign tax credit as:
- HMRC regarded the LLC as opaque for UK tax purposes.
- The LLC had therefore, in HMRC’s eyes, effectively paid a “dividend” to the taxpayer.
- This meant that the taxpayer had not been taxed in the UK on the same income as that on which the LLC had been taxed in the US.
Earlier decisions in this case had focussed on the fact that the taxpayer did not have a proprietary right in the LLC’s underlying assets, and that the taxpayer relied on a contractual right to receive their profit share. However, the Supreme Court held that the critical question is to consider the source of the income, and to determine whether one treaty country is taxing the same income as the other treaty country.
It is clear from the decision that it will be necessary to look at a particular entity’s arrangements in any case, and that the decision does not produce a rule that can be applied, in all cases, to all Delaware LLCs or indeed other non-UK, locally-transparent entities.
However, HMRC may now need to revisit its stated guidance on Delaware LLCs (at least), as it currently states: “the Revenue take the view that for UK tax purposes LLCs should be regarded as taxable entities and not as fiscally transparent. Accordingly, the UK taxes a UK member of an LLC by reference to distributions of profits made by the LLC and not by reference to the income of the LLC as it arises … It follows that relief for underlying tax is not available to an individual UK member of an LLC.”
The decision can be found here.