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UK double taxation treaties and Delaware LLCs

The upper tax tribunal has released its decision in respect of HMRC v George Anson, a case which involved the interpretation of the UK/US double taxation agreement in respect of Delaware LLCs.

By way of background it is helpful to understand the following:
• A transparent entity is one in which the member is entitled to a share in the underlying income of the entity as it arises and is therefore charged to tax on their share of the profits on that basis. Examples include a partnership or limited liability partnership.
• An Opaque entity is one in which the member is taxed only on the distributions made by the entity. For example a limited liability company.
• With a Delaware LLC the holders are the owners of units in the LLC and unless the LLC elects to be treated as a corporation it is treated as transparent for US tax purposes. This means that the holders of units pay tax on their share of the LLC’s profits in the same way that a partner in a partnership would pay tax on their share of partnership profits in the UK.
• In the eyes of the UK tax authorities, as a Delaware LLC unit holder has no right to the assets of the Delaware LLC they therefore have no right to “a share in the profits as they arose” merely to “a share in the profits”. HMRC therefore treats income from a Delaware LLC as opaque for UK tax purposes.
• Double taxation relief allows a UK taxpayer to offset tax paid in another country against tax due in the UK provided the tax is for the same transaction.
• Delaware is a US corporate haven with over 50% of US companies registered there.

In this instance, Mr Anson, a UK non-domiciled citizen received a payment from a Delaware LLC which was accordingly taxed in the USA as a transparent payment. He then remitted the funds to the UK. HMRC sought to tax him in respect of this income as an opaque payment with no allowance given against the tax paid in the USA.

An earlier tax tribunal found in Mr Anson’s favour but the second tier tax tribunal has now found in favour of HMRC, effectively restoring the commonly understood interpretation in respect of double taxation agreements as applied to Delaware LLCs.

The case has highlighted the complex nature of international double taxation arrangements and the care which is required in arranging international tax affairs. As tax mitigation specialists Newshams are able to give advice on how double taxation tax may affect any private or business transaction and how to put in place an effective international taxation strategy.

Contact us now on 020 7470 8820 and ask to speak to a tax adviser about how we can reduce your international transaction tax costs or e-mail us at enquiries@newshams.com and we’ll get straight back to you.

http://newshams.com

14 September 2011

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