Court of Appeal rules that General Electric was not dual resident in the UK and US

In GE Financial Investments Limited v HMRC [2024] EWCA Civ 797, the Court of Appeal (CoA) overturned the Upper Tribunal’s (UT’s) decision that the UK-incorporated company was also US resident under the UK/US Double Tax Agreement (DTA). The claim for Double Tax Relief (DTR) in the UK was denied. 

• GE Financial Investments Ltd (GEFI UK) is a UK-incorporated company and subsidiary of the US General Electric Company (GE) Group.
• GE Financial Investments Inc (GEFI US) was a US Associate within the same group.
• The shares in GEFI UK and GEFI US were 'stapled' together, meaning the sale of one set of shares required the sale of the other to the same purchaser.
• Share stapling falls under US anti-avoidance legislation, which deemed GEFI UK to be a 'domestic' corporation subject to 'full' taxation (i.e., on worldwide profits) in the US.
• In effect, GEFI UK was treated as resident in the UK and US under each territory's domestic tax legislation.
• GEFI UK was a member of GEFI Limited Partnership (LP). GEFI UK 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 to the US anti-avoidance legislation.
• HMRC denied GEFI UK's claim for DTR and GEFI UK appealed to the FTT.
• The FTT held that GEFI UK was not entitled to DTR because it was not resident under Article 4, and was not operating a US permanant establishment under Article 7. The taxation rights remained with the UK (Article 11 Interest).
• GEFI UK appealed to the Upper Tribunal, which held that relief was available because GEFI UK was treated as resident in the US under the UK/US Double Tax Agreement (DTA). 
• HMRC appealed to the Court of Appeal (CoA). 

 The CoA found that:

• Under the UK/US DTA a "resident of a Contracting State" means any person liable to tax under the laws of that State due to domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature (Article 4 (1)).
  
  • GEFI is not liable to tax in the US by actual incorporation in the US or by any criteria listed in Article 4(1).
  • GEFI’s status as a stapled entity does not amount to a criterion of a similar nature. 
  • The UT erred in law by concluding that GEFI was US resident for DTA purposes.
  • The CoA allowed HMRC’s appeal on this issue.

• GEFI UK did not conduct business through a US permanent establishment for the purposes of the DTA.
  • Its only US activity was its interest in the LP, where it had no active participation as a limited partner.
  • The LP's purpose was to hold financial receivables and other assets, with no legal requirement to conduct business.
  • The loans were conducted on sound business principles, but there was no evidence of continuous and regular commercial activities conducted by the LP personnel or agents in the US.
  • The LP merely acted as a passive holding vehicle for loan receivables. The size of the loans is irrelevant; the test is qualitative. The board of GEFI Inc, as the LP’s general partner, made no strategic decisions and had little involvement.
  • The FTT correctly focused on the lack of activity by the general partner, and the CoA dismissed GEFI UK’s appeal on this issue.

The COA allowed HMRC's appeal, this reinstates the FTT’s conclusion that the UK is not required to confer DTR for US tax paid on GEFI UK’s interest income. 

Useful guides on this topic 

UK/US Treaty residency determined by domestic law
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.

Companies: Permanent establishment & residence
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Tax treaties: Where do you live?
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Tax treaties: OECD glossary of terms
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Associated Companies & tests for Control
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Groups
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External link

GE Financial Investments Limited v HMRC [2024] EWCA Civ 797

UK/US Double Taxation Agreement