Following the taxpayer’s victory in the recent Supreme Court decision of HMRC v Anson, UK resident members of Delaware LLCs may now be entitled to claim relief against their UK tax liabilities for US tax paid on their share of LLC profits.
Mr. Anson was a non-domiciled UK tax resident and a member of a Delaware LLC. As a non-domiciled individual, he was liable to UK income tax on his UK source income and on any foreign source income remitted to the UK. Although not resident in the US for tax purposes, as a member of the LLC he was also liable to US federal and state taxes on his US source income, being his share of the profits of the LLC. As Mr. Anson remitted his US source income to the UK, he suffered double tax on his share of the LLC profits, and the question arose as to whether he was entitled to double tax relief.
The UK/US Double Tax Convention provides that tax paid in the US is allowed as a credit against any UK tax which is “computed by reference to the same profits or income”. In Anson, which was argued at the First-tier Tribunal, Upper Tribunal and the Court of Appeal before reaching the Supreme Court, the key question was whether the income on which Mr. Anson paid tax in the US was the same as the income on which he was liable to tax in the UK. In essence, this turned on whether Mr. Anson’s income from the LLC arose (i) when profits were earned by the LLC, or (ii) only when those profits were distributed by the LLC to its members.
Supreme Court Decision
Basing its decision on the Delaware LLC Act and the terms of the applicable LLC agreement, the Supreme Court overturned the decision of the Court of Appeal and held that Mr. Anson automatically became entitled to profits as they were generated by the LLC, prior to and independent of any subsequent distribution. Consequently, the Court held that Mr. Anson was taxable in the US and the UK on the same profits and was entitled to credit against his UK tax liabilities for tax paid in the US.
The decision is potentially very positive for UK resident members of US LLCs who have, since the upper tribunal overturned the original decision in Mr. Anson’s favour, been unable to claim credit in the UK for their US tax liabilities.
However, the decision is contrary to HMRC’s long-standing practice that an LLC is not fiscally transparent and should be treated much like an overseas company (although the decision does not go so far as to treat the LLP as a partnership for tax purposes and should not change the capital gains tax treatment of investments in LLCs). It therefore remains uncertain how HMRC will apply the Supreme Court’s judgment in practice. For example, the Supreme Court’s decision was based on the Delaware LLC law and the specific LLC agreement. It does not necessarily follow that relief will be available to UK members of all US LLCs (for example LLCs established outside Delaware) or indeed all Delaware LLCs. However, it is to be hoped that HMRC will apply a consistent policy to all US LLCs in order to achieve maximum clarity and certainty for taxpayers and to encourage cross border investment.
The flip side to the Supreme Court decision is that going forwards, much like the UK tax treatment of partners in a partnership, UK resident members of an LLC will likely (subject to the availability of double tax relief and the specifics of the LLC) be taxable in the UK on their share of LLC profits as they arise, even if those profits are not distributed.
Pending the publication of further guidance from HMRC, UK resident members of US LLCs should review their tax returns for past periods and should seek specialist advice as to whether it may be possible to retrospectively claim relief and seek a refund of overpaid UK tax.
UK corporation taxpayers with investments in LLCs should also reassess their tax treatment as tax exempt distributions may now be treated as taxable overseas trading income for UK tax purposes (albeit with an overseas tax credit to the extent tax has been paid on those overseas profits).