UK tax treatment of US LLC: HMRC’s practice following Anson
We reported earlier this year on the UK Supreme Court’s decision in HMRC v Anson, in which it was held that a UK taxpayer, Mr. Anson, was entitled to claim relief against his UK tax liabilities for US tax paid on his share of profits of a US LLC. HMRC has now published its response to that judgment, confirming that, in general and subject to the specific facts, it will continue its long standing practice of treating US LLCs as companies.
In a previous update we described how earlier this year the Supreme Court held in HMRC v Anson that Mr. Anson, a UK member of a Delaware LLC, was entitled to claim double taxation relief against UK tax liabilities for US tax paid on his share of the LLC profits.
The Supreme Court based its decision on the Delaware LLC Act and its interpretation of the terms of the applicable LLC agreement and concluded that Mr. Anson was automatically entitled to profits as they were generated by the LLC, prior to and independent of any subsequent distribution.
In contrast, HMRC had contended that Mr. Anson had instead received a distribution from the LLC and therefore no double tax relief was due because the US tax was charged on the share of the profit rather than on a distribution of it. This distinction is important as the UK/US Double Tax Convention provides that tax paid in the US is allowed as a credit against any UK tax which is “computed by reference to the same profits or income.”
Following the decision in Anson, it was uncertain how HMRC would apply the Supreme Court’s judgment.
HMRC’S Response to Anson
On September 25, HMRC published its response to the Supreme Court’s decision in Anson.
HMRC’s response states that it will treat HMRC v Anson as confined to its specific facts. HMRC will therefore not be altering its existing general approach to US LLCs for UK tax purposes. In many respects, this is not a surprising approach since the case did not specifically focus on the UK tax treatment of US LLC’s but rather on Mr. Anson’s personal tax position.
This means that “where US LLCs have been treated as companies within a group structure HMRC will continue to treat the US LLCs as companies, and where a US LLC has itself been treated as carrying on a trade or business, HMRC will continue to treat the US LLC as carrying on that trade or business”.
In addition, HMRC has confirmed that it will continue with its existing approach to determining whether a US LLC should be regarded as having “issued share capital”.
HMRC’s response should give corporate groups incorporating US LLCs comfort that the historic opaque treatment of the LLC should generally be respected. However, there may be some degree of uncertainty in scenarios closely mirroring the Anson fact pattern. Those establishing new US LLCs with the objective of achieving a particular UK tax treatment should exercise additional care to ensure that the drafting of the US LLC documentation is consistent with that objective.
HMRC will consider the treatment of UK tax payers claiming double tax relief on the basis of the Anson decision on a case by case basis. Individuals seeking to rely on Anson should seek specialist advice on the application of the judgment to their circumstances.