05 May 2016
The UK Supreme Court has allowed double tax relief under the US/UK Double Tax Agreement (DTA) for a UK resident member of a Delaware Limited Liability Company (LLC). There had been uncertainty regarding the Irish tax treatment of LLCs and so the judgment will be of interest to Irish taxpayers who are in receipt of income from Delaware LLCs.
Mr. Anson was a UK-resident member of a Delaware LLC. The members were taxed in the US on their share of the LLC profits, whether or not that sum was actually distributed to them. Anson, as a UK resident but non-domiciled individual, was taxed under UK law on that portion of his share of the LLC profits which he remitted to the UK. He sought to rely on a provision of the US/UK DTA (which is almost identical to the corresponding provision in the US/Ireland DTA) to claim a credit against his UK tax liability for US taxes paid. The key question was whether the income of the US LLC on which Anson suffered US tax was the same income which was subject to UK tax.
HMRC argued that the profits taxed in the US were the profits of the LLC, whereas the profits taxed in the UK were the distributions made by the LLC to its member. This was consistent with published HMRC guidance, stating that HMRC regards LLCs as taxable entities and not fiscally transparent. Irish Revenue guidance regarding the treatment of LLCs is limited to stating that an LLC will be looked through for Irish interest withholding tax purposes – no published Revenue guidance exists as to the treatment of an Irish member of an LLC. However, it is understood that, in the past, Irish Revenue has been inclined to follow the HMRC position in treating LLCs as opaque for such purposes.
The UK Supreme Court’s approach was to consider the legal regime governing the rights of the LLC and its members in order to determine whether a profit that arises from a business carried on by an LLC constitutes the income of the LLC members or the LLC itself. The Court concluded that the profit on which Anson’s UK tax liability was computed was the profit arising as a result of the business being carried on by the LLC – this was undeniably the same profit on which Anson was taxed in the US and therefore double tax relief should be available.
The judgment goes against the long-standing HMRC practice of regarding LLCs as opaque and the published HMRC guidance regarding double tax relief. Given the lack of Irish Revenue guidance on how LLCs are to be treated for Irish tax purposes, the decision by the highest court in the UK is significant, particularly in the context of double tax relief. Irish taxpayers may therefore wish to consider whether there is an opportunity to claim double tax relief that they may have heretofore thought unavailable.