In GE Financial Investments Limited v HMRC [2023] UKUT 146, the Upper Tribunal (UT) held that a UK-incorporated company was also US resident under the UK/US Double Tax Agreement (DTA) although it had no Permanent Establishment (PE) in the US. That was enough to allow a claim for Double Tax Relief (DTR) in the UK. 

  • GE Financial Investments Ltd (GEFI UK) is a UK-incorporated company and subsidiary within the wider US General Electric Company (GE) Group.
  • GE Financial Investments Inc (GEFI US) was a US Associate within the same group.
  • The shares in the two subsidiaries were 'stapled' together, meaning the sale of one set of shares would require the sale of the shares in the other, to the same purchaser.
  • Share stapling falls within US anti-avoidance legislation, the result of which meant that, as GEFI UK was ultimately owned by US shareholders and linked to GEFI US, it was to be treated as a 'domestic' corporation for US federal tax purposes.
    • US Tax Residency is determined by incorporation and splits companies into domestic and foreign entities. Domestic companies are US-incorporated or deemed as such by the legislation.
    • Being a US tax resident as a domestic company means being subject to 'full' taxation, i.e. on worldwide profits.
    • As such, GEFI UK was treated as resident in both the UK and US under each territory's domestic tax legislation.
  • Both subsidiaries were partners in GEFI Limited Partnership (LP), a US Partnership. Both made loans to the LP, which onward lent to the rest of the GE group. Interest on these loans was received by GEFI UK and subject to tax in both the UK and US due its residency position.
  • HMRC denied GEFI UK's claim for DTR and GEFI UK appealed to the FTT: 
  • The FTT held that in order to be entitled to DTR, GEFI UK would need to be:
    • Resident as per Article 4 of the UK/US DTA.
    • If not resident under Article 4, taxable in the US by virtue of operating a Permanent Establishment (PE) as per Article 7.
    • If Article 7 applied, there would need to be a non-discrimination clause within the DTA (Article 24).
    • The FTT held that GEFI UK was not resident under Article 4, and whilst there was a non-discrimination clause, GEFI UK was not operating a US PE. The interest was not taxable under Article 7 and taxation rights remained with the UK (Article 11 Interest).

On appeal to the UT, it considered Article 4 in detail:

  • While most DTAs mirror the OECD Model Convention, the UK/US DTA did not. This was because the US differed in its test for residency, being purely based on incorporation and not through direct links to the territory in question, such as a place of effective management.
  • Case law and the Organisation for Economic Co-operation and Development (OECD) Commentary on the Model Convention show that the effect of Article 4(1) is that residency is attributed where a territory has full taxing rights.
  • The concepts of residency as listed, or not, in Article 4(1), were to be interpreted in line with the domestic tax legislation of each territory party to the DTA. The key part of the definition was the full taxing rights. A company treated as resident under domestic law and taxed in full could not conceivably be not resident under the treaty.
  • On this basis, GEFI UK was resident in the US under the UK/US DTA and entitled to DTR.

The UT went on the consider whether GEFI UK had a Permanent Establishment in the US.

  • Article 5 (PEs) requires the carrying on of a business. As per Article 3, General Definitions, the term refers to the 'performance of professional services and of other activities of an independent character'.
  • The Model Convention states that the definition of business should take its meaning from domestic law.
  • Under UK tax legislation, the receipt of interest does not necessarily require the Carrying on of a business.
  • Case law requires the activities of a company to be considered as a whole. Periods of inactivity do not have to mean there was no business.
    • The FTT had considered all the relevant principles established in case law.
    • Having not erred in law, the FTT's decision stands.
  • GEFI UK did not operate a PE in the US as decided by the FTT.

As GEFI UK was resident under Article 4, the appeal was upheld.

Useful guides on this topic

Companies: Permanent establishment & residence
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Tax treaties: Where do you live?
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Tax treaties: OECD glossary of terms
What common terms are used in Double Tax Treaties? Where can I find a glossary?

Is it a Trade, a Business or an Investment?
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Associated Companies & tests for Control
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External link

GE Financial Investments Limited v HMRC [2023] UKUT 146

UK/US Double Taxation Agreement

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