Press Room

31 Mar 2020

UK treatment of US LLCs – Anson revisited…

Opaque or Transparent, that is the question! Why do we care? It might seem far fetched to think that the terms ‘opaque’ and ‘transparent’ have such a meaning in the world of taxation. However, their definitions are of utmost importance for UK tax resident individuals who are members of a US LLC and the terms should be interpreted with caution.

An LLC set up under US law (in particular Delaware) is an attractive entity because it is seen as ‘transparent’ (flow-through) for US tax purposes. This means that any profits generated by the LLC are not recognised by the company, but are instead taxed as income on the LLC members – this is similar to a partnership structure in the UK.

In the absence of a sophisticated ‘check the box’ regime, the UK solely relies on case law and guidance from HMRC to determine the characteristics of certain foreign entities. HMRC’s International Manual sets out a list of foreign entities that are classified as ‘opaque’ and ‘transparent’, as well as summarising the factors or hallmarks that an entity must possess in order to fall into each category (e.g. the issuing of ordinary share capital usually means that an entity is considered as a company and is therefore is opaque). The rules are certainly not as clear cut as the US and rely heavily on interpretation.

The problem

With differing rules, it is not surprising that there is room for confusion between the UK and US tax treatment of US LLCs.

Although an LLC is considered transparent under Federal law, HMRC’s guidance indicates that a US LLC is considered as an opaque entity in the UK, treated as a company and therefore the individual is taxed on the distributions from the LLC as they are received.

The first problem here is that there can be a timing issue between the taxing events: a US LLC might produce annual income that is taxable on it’s members on a yearly basis, but it might only distribute the profits of the LLC once every 5 years. This means that there would be a US taxing event every year, but a UK taxing event only every 5 years. This clearly causes a mis-match in timing for claiming foreign tax credits and although some solutions have been thought of to try and rectify the issue, these have recently come under scrutiny from HMRC.

Regardless of whether the LLC distributes every year, there is a second issue. HMRC can consider the receipt of a ‘distribution’ and a ‘share of profit’ as two different types of income and a foreign tax credit can only be claimed against income of the same type. Hence, the possibility of being exposed to double taxation in both the UK and the US.

Anson v HMRC [2015] UKSC 44

Mr Anson was a UK resident non-UK domiciled individual. He was also a member of a Delaware LLC, thus presenting a rather unfortunate set of facts.

He paid Federal tax on his member’s share of the profits of the LLC in accordance with US Federal law, and remitted some of the profits he received to the UK (the remittance being subject to UK income tax), while claiming double taxation relief for the US tax. However, HMRC denied the claim for relief and made amendments to Mr Anson’s tax returns and raised discovery assessments. The First Tier Tribunal (FTT) allowed Mr Anson’s claim for tax relief for the US tax paid on the LLC profits against the UK tax due upon the remittances. This was on the basis that, as a member of the LLC, which did not have anything equivalent to share capital, Mr Anson was entitled to the profits of the LLC as they arose and accordingly was taxed upon the same income in both the UK and the US. He was, therefore, entitled to double taxation relief under the UK/US double taxation agreement.

This decision was overturned by the Upper Tier, denying Mr Anson his relief, and the Upper Tier’s decision was upheld by the Court of Appeal in a unanimous decision.

Surprisingly, the Supreme Court went on to overturn the decision of the UTT and Court of Appeal. The Court confirmed that the FTT had found, as a fact, that Mr Anson had received the same income as the LLC and as they had no reason to find against that finding relief should be allowed. The court held that the income was personally received by Mr Anson from both a UK and US perspective, and allowed a credit for foreign taxes paid.

Although Mr Anson ended up with a positive result, this is not set in stone. To summarise HMRC’s announcement in Brief 15 (2015), ‘individuals that are claiming double tax relief and relying on the Anson vs HMRC decision will be considered on a case by case basis‘.  Andrew Parkes, who was part of the HMRC team on this case (and who never tires of telling people that HMRC won his point), confirms that during the hearing itself the Supreme Court commented that it was open to a different First Tier Tribunal, when faced with the same facts, to find that the income was not the same. Whether HMRC decide to test this is a different question.

Don’t panic – we’re here to help

The classification of foreign entities in the UK and the US is a complex matter and an understanding of the statutory and treaty provisions is often required to determine the type of entity in question.  We are often asked to assist clients faced with unusual circumstances involving companies, hybrid entities, trusts and foundations. So, if you live in the UK and are a member of a US LLC and think you might be affected by these rules, please get in touch with our team who can help.

Andrew Parkes

Andrew is a highly experienced international tax specialist who worked at a senior level in HMRC’s international teams for over 10 years. He has a wealth of experience and technical knowledge.

Email: Andrew Parkes