A recent tax case involves the tax treatment of income remitted to the UK from a member of a Delaware LLC. Should it be taxed as a partnership profits or dividends in the UK?
A limited liability company (LLC) formed in the US state of Delaware is taxed transparently in the US so that its profits are taxed as the income of their members. In the UK these LLCs are treated as companies. This difference could create a tax advantage or a disadvantage depending on the interaction of double taxation relief (DTR).
Delaware companies have a variety of other features: they are not subject to tax in state of Delaware, the state also has a separate legal system and above all secrecy; company ownership is not publicly available for these corporations.
Tax case: George Anson v HMRC
Mr Anson was a participant in a Delaware LLC. He was at the relevant time non-domiciled in UK, and so was taxed on remittances. He remitted his income from LLC.
After making a discovery HMRC sought to assess Mr Anson to tax on the basis that the income remitted from the LLC was treated as a dividend. HMRC contended that in English law the LLC fell to be treated as “opaque” so Mr Anson was not entitlement to DTR for various federal taxes paid personally.
The First Tier Tribunal thought hard about the conundrum and found that members of an LLC have interests akin to the interests of a Scottish partner, although both Mr Anson's barrister and HMRC's had difficulty in deciding what the First Tier really thought.
Mr Justice Mann sitting at the Upper Tier Tribunal unpicked the First Tier's decision and found that he did not agree. He thought that unlike a partnership the members of an LLC do not have an interest in its profits in “any meaningful sense”; and that therefore the profits on which tax has been paid in the US are the profits of the LLC. He decided that Mr Anson is taxed on something different in the UK which were distributions from (or entitlement under) the LLC agreement.
The decision means that for Mr Anson the DTR test is therefore not fulfilled and he receives no credit for the US tax he paid as an individual.
The parties were then ordered to go back and consider the application of s739 ICTA 1988. These are anti-avoidance measures designed to counter the transfer of assets abroad by a UK resident so that income becomes payable to persons resident or domiciled outside the UK. That aspect of this case is, as they say, another story.
Editorial comment
It seems quite surprising that this issue has not previously come before the courts as Delaware LLCs have been around for a considerable time. Clearly it is either unusual for a non-domiciled individual to remit income from such a company back to the UK or it is unusual for HMRC to discover that an individual is so doing.
Mr Anson may yet appeal as the sum involved are no doubt material.
The Government is proposing legislation which will introduce a general anti-avoidance rule to prevent abuse of double taxation agreements. It seems that this would be unlikely to affect the issues raised in Anson v HMRC.
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