LLC’s Again – Here But Not There
Since it was published, our article on US Limited Liability Companies (LLC) and the UK Supreme Court’s decision in Anson has led to a number of queries from both UK and US taxpayers who either are, or want to use a US LLC in their structures.
As a follow up to the article we thought we would outline some of the basics for the use of a US LLC, as it is not always “bad news”.
Seems like a good idea
Probably the biggest advantage and often the reason for using a LLC, is that it is American. Like customers all over the world, Americans often like dealing with entities that are familiar and home grown. LLCs hit this spot, whereas a UK limited company, for example, may well put some potential customers off.
However, with a US entity you have to deal with the IRS, some of whose agents carry guns; always a sobering thought! This is not the case with a LLC, unless you “check the box” to make it taxable. Under US law, a LLC is either disregarded or a partnership depending on whether it has one or more members (shareholders to you and me). This means that if the LLC does not have an actual US business, it will not have to deal with the IRS at all. For example, if a business has no presence in the US, selling to US customers via a UK website and shipping the goods from the UK then it is highly likely that it will not have any sort of business that is subject to US Federal Taxes.
The UK though, still treats the LLC as a company allowing for profits to be reinvested, or held, after being charged at the lower corporation tax rate. It does have to register with Companies House, filing accounts even though the US legislation does not require them.
Often though, a UK taxpayer is being asked to invest in a US business alongside US investors. This is where the problems start, unless the LLC is just holding non-income producing assets (unlikely, we know) then it may not matter.
Imagine that the company has been set up to invest in US land, and the investors have got it right, buying in a downturn and, without doing anything to the land, it is now riding high. If our UK investor sells their investment in the LLC, the UK will treat them as selling “shares”, whereas the US will treat them as selling the land. The whole Anson saga was whether the UK and the US were taxing the same income and this looks similar. However, as ever with tax, the devil is in the detail and here the UK/US Double taxation agreement will treat the “two” assets as if they were one. Or rather, the OECD commentary to Article 23 requires the UK to give credit for the US tax as it is a conflict of qualification.
But perhaps not
Back to the detail though, if the LLC sells the land whilst the UK investor retains their shares, then you may get real double taxation. Again, the US will see the investor as selling their share of the land, but the UK will see the LLC doing so. From a UK point of view, the UK taxpayer still owns their asset, the interest in the LLC, it is just now “backed” by cash held by the LLC and not the property.
This is the same problem with any income of the LLC. The US will see the UK investor as having earned the income, whilst the UK will see the LLC and HMRC will refuse double taxation relief in respect of any US tax when that income is distributed to the UK investor.
Anson to the rescue?
We would say not. Mr Anson won his case of course, but it was a finding of fact and the Supreme Court acknowledged that a different First Tier Tribunal could have found differently on the same facts. This, plus both the Upper Tier and the Court of Appeal finding for HMRC, means it is a shaky decision and you wouldn’t bet your house on a decision going your way.
Also, HMRC have been quite canny with how they have handled it. By stating that they will continue to treat LLCs as companies, they keep UK Plcs happy, given groups are likely to have significant problems if LLCs all disappeared in a puff of smoke.
However, by saying that they will consider each Anson claim on a case by case basis they get to pick their battle. If the LLC is a small one, based in Delaware (or somewhere with a LLC act very close to Delaware) and with an operating agreement close to the one in Anson, HMRC can “let it go” without really risking anything. Conversely, if there is enough money at stake, the LLC is in a State with very different law to Delaware and the operating agreement is also different, HMRC has the cover to launch Anson Round 2. If the First Tier is less sympathetic, say it is an avoidance scheme and not a real commercial situation as with Mr Anson, suddenly the score is 1-1.
In effect, the question then becomes the one Mr Clint Eastwood asks in one of his famous roles “Do I feel lucky?”