What is the issue?
When a UK individual or company invests outside the UK, there are many overseas entity types that can be used to ‘hold’ the investment and the investor’s UK tax position will depend on how the UK rules treat the overseas investment entity for tax purposes.
A key issue is whether the UK regards the overseas entity as having transparent or opaque status; the UK tax consequences being as follows:
Transparent entities: Income is normally immediately taxable on the UK investor as it arises in the investment entity.
Opaque entities: Income is normally taxable on the UK investor only when it is distributed by the overseas entity to the UK investor (unless anti-avoidance provisions apply).
As well as impacting the timing of when tax is payable, the entity’s status can also affect whether a UK person is entitled to claim double tax relief for overseas taxes paid against their UK tax liability on the entity’s income. Generally, a UK investor in an overseas entity that is regarded as transparent can claim relief for overseas tax suffered on the same income. Individual investors in an entity that is regarded as opaque, cannot claim double tax relief for underlying tax paid by the entity.
What happens in practice?
It is common for many UK investors in the United States to structure their investments through a Limited Liability Company (LLC). This is often a preferred structure as, amongst other benefits, LLCs in US states such as Delaware and Nevada may have flexible constitutions, meaning the investor can hold their US interests in line with their commercial needs whilst maintaining limited liability status.
HMRC’s view is that US LLCs are generally opaque for UK tax purposes, but that local laws governing the company’s creation and existence and the terms of the UK:US double tax treaty may be relevant in determining a particular entity’s status for these purposes.
What did the Supreme Court decide?
In the recent case of Anson v HMRC the UK Supreme Court decided that a Delaware LLC had particular characteristics such that it should be treated as transparent for UK tax purposes and a UK individual investor was entitled to relief for US taxes. This was good news for the investor who would otherwise have faced a prohibitive combined UK and US tax rate on his overseas investment income.
The decision is the final word on a case that has been making its way through our judicial system for a number of years. In reaching its decision, the Supreme Court extended the analysis of the lower courts, focusing on the constitution of the particular LLC and how this interacted with the UK’s detailed double tax relief provisions with the US.
Why does this decision matter?
Despite HMRC’s view that LLCs are generally opaque, it has never been clear whether US LLCs with particular internal constitutions are opaque for UK tax purposes. Therefore, the decision that Mr Anson is entitled to double tax relief is not inconsistent with HMRC’s view.
However, this case highlights the difficulty of determining the UK tax treatment of overseas investment entities, and that lengthy legal debates can arise even over commonly held overseas investment structures. HMRC has confirmed that its current guidance in this area will remain unchanged on the basis Anson was found on its particular facts.
In light of this decision, UK investors with interests in US LLCs or other similar overseas investment entities, should review the UK tax treatment currently adopted. It is possible that the decision will impact their UK double tax relief position and hence, lead to greater scrutiny of whether interests in overseas investment entities should more often be treated as transparent for UK tax purposes. The decision ought also to be borne in mind when setting up new overseas investment structures. For further information please contact Dan Robertson or your usual RSM adviser.