The UK’s Supreme Court decision that a US individual and UK resident taxpayer was entitled to tax relief in the UK under the US/UK double tax treaty on his US income arising from a US Limited Liability Corporation (LLC) affects a number of different structures.
The landmark judgment in the Anson case in 2015 reversed the long-standing position which the UK tax authorities, HM Revenue & Customs (HMRC), had adopted in relation to US LLCs. Investors in US venture capital and private equity funds are likely to be particularly interested in this case.
What are Limited Liability Corporations?
LLCs are a popular choice of business or investment vehicle among US individuals and investors in US investment funds. They are corporate vehicles offering limited liability to their members (and so broadly similar to Limited Liability Partnerships in the UK).
However, LLCs historically presented difficulties for taxpayers resident in the UK. For US tax purposes, the members of an LLC are typically taxed on the profits of the LLC as they arise – that is to say the LLC is treated as ‘transparent’ for US tax purposes (similar to a partnership).
Prior to the UK Supreme Court judgement in the Anson case, HMRC’s stance was that an LLC was ‘opaque’ for UK tax purposes (similar to a company). In practice, this meant that a UK taxpayer may have paid tax on profits from the LLC in the US, and then also have paid tax in the UK when a distribution was received. Because HMRC took the view that the tax was paid on different sources of income, relief for tax suffered in the US was not available in the UK. These unfortunate circumstances could give rise to a total effective rate of tax across the US and UK far in excess of the top rate of income tax in the UK.
Background to the case
The taxpayer argued that he should be entitled to relief in the UK for the US tax suffered on his LLC profits, under the US/UK double tax treaty. He argued that the US tax was borne on the same income as that liable to tax in the UK. HMRC contended that the income was not his, but instead belonged to the LLC; the US tax was on different income to that taxed in the UK, and therefore double tax relief was not available.
The case was eventually heard by the UK Supreme Court, which decided in favour of the taxpayer. Since the Supreme Court is the UK’s highest court, the ruling cannot be overturned without specific legislation.
The narrow consequence of this judgment is that double tax relief is available in the UK, eg a UK resident taxpayer can take credit for the US tax suffered on the profits of a US LLC. This should reduce the maximum effective rate of tax suffered in many cases.
Impact of the case
UK resident and domiciled investors in US venture capital and private equity funds are likely to be particularly interested in this case, along with those who hold interests in LLCs established in the US or elsewhere. However, it is important to note that this ruling will not automatically affect every LLC, since the judgment was very dependent on the application of the Delaware Limited Liability Corporation Act and the situation may be less clear cut in other states and other countries.
In response to the Supreme Court judgement, HMRC issued revised guidance stating that it considers the decision to be specific to its facts and that individuals claiming double tax relief in reliance on the Anson decision will be considered on a case by case basis. HMRC also confirmed that where US LLCs have been treated as companies within a group structure HMRC will continue to treat them as companies, and where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat it as doing so.
In practice, HMRC will continue to treat most LLCs as opaque. However, following the Anson decision it may be possible in some cases to structure an LLC as transparent. This can provide double tax relief for many taxpayers that was not previously available. On the other hand there may be pitfalls, in particular for UK resident non-UK domiciled individuals. Below is an outline of potential consequences for different taxpayers, including individuals, trustees and companies. However, it is strongly recommended that owners of LLCs review their own specific circumstances.
This summary has been produced for guidance only and does not constitute professional advice. If you have any queries or would like advice in relation to a specific transaction then please speak to your usual Saffery partner, or contact Robert Langston.