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Technical updates // 18/07/2015

All change for US LLCs

A ruling by the UK Supreme Court now makes it for more tax efficient for UK resident individuals to invest in US Limited Liability Companies.

The tax treatment of income from an individual’s share in a corporate entity depends on the whether the entity is treated as “transparent” or “opaque” for tax purposes. UK companies are generally seen as opaque. They pay corporation tax in their own right and shareholders pay income tax at an effective rate of 0, 25 or 30.6 percent on profits paid out as dividends.

Conversely, a UK Limited Liability Partnership is treated as transparent, so the members pay income tax as profits arise at the non-saving rates of 20, 40 and 45 percent.

When it comes to overseas entities such as Limited Liability Corporations incorporated in Delaware, the picture is not so clear. Historically HMRC has treated them as opaque, despite the fact that a member of a Delaware LLC is legally entitled to their share of profits as they arise. This has resulted in high effective tax rates on the LLC profits. In the US, taxes on profits typically exceed 30%, and the net income remitted to UK-resident members then
suffers UK income tax at the dividend rate. There is no double tax relief because the US tax is deemed to be charged against the LLC, which HMRC sees as a separate legal entity from the individual.

This treatment was challenged by Mr Anson, a UK resident but non-domiciled member of the Delaware corporation HarbourVest Partners LLC. Mr Anson had claimed double tax relief on the profits remitted to the UK on the basis that he was entitled to the profits of the LLC as they arise. Initially, the First Tier Tribunal sided with the tax payer, and agreed that the profits were that of Mr Anson and he should pay income tax on this basis. However the Upper
Tribunal subsequently overturned this decision and Mr Anson’s appeal was rejected by the Court of Appeal.

The case eventually reached the Supreme Court, which ruled that a Delaware LLC should be treated as transparent for UK tax purposes, meaning that an individual can claim double tax relief on the US taxes charged on the LLC’s profits. The Court concluded:

“If, then, Mr Anson was entitled to the share of the profits allocated to him, rather than receiving a transfer of profits previously vested (in some sense) in the LLC, it follows that his ‘income arising’ in the US was his share of the profits. That is therefore the income liable to tax under UK law, to the extent that it is remitted to the UK [Mr Anson was not UK domiciled].

There is no dispute as to the income which was taxed in the US: that was Mr Anson’s share of the profits of the LLC. Mr Anson’s liability to UK tax is therefore computed by reference to the same income as was taxed in the US. He accordingly qualifies for relief under article 23(2)(a).

For these reasons, I agree with the conclusion reached by the FTT, and would therefore allow the appeal.”

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