UK Supreme Court Case Of Anson v. HMRC [2015] UKSC 44

Delaware LLC held to be UK tax transparent

The UK Supreme Court has handed down its judgment on the final appeal in the Anson case, in which it treated a taxpayer's interest in a Delaware LLC as transparent for UK tax purposes. This result is surprising as it had previously been HMRC's general practice to treat a Delaware LLC as opaque for UK tax purposes.

As a result of this judgment, it will be necessary to reconsider the position of specific Delaware LLCs from a UK tax perspective, particularly where the Delaware LLC was previously expected to be treated as opaque for UK tax purposes. While the judgment does not prevent Delaware LLCs from being treated as opaque, this treatment is potentially less likely than previously expected, and it will turn on whether the partners have an interest in the profits of the LLC as they arise under Delaware commercial law and the LLC agreement. The judgment may also present opportunities for UK taxpayers to claim credits for U.S. tax paid on profits from an LLC.

This judgment is contrary to HMRC's currently published general position on LLCs and so we expect them to issue some reaction or revised guidance over the coming weeks which may help to provide further clarity.

Case summary

The case concerns profits paid by a Delaware LLC to a member ("the Member") and the availability of UK tax credits in respect of the U.S. tax paid by the LLC on those profits under the U.S.-UK double taxation treaty (Article 23(2)(a)). Credits would be available if the UK tax was "computed by reference to the same profits or income by reference to which the United States tax [was] computed". However, HMRC denied the credits on the basis that the profits taxed in the U.S. were the profits generated by the LLC, whereas the profits taxed in the UK were the distributions made by the LLC to the Member. The key question was, therefore, as a matter of UK tax law, was the Member taxed on the profits of the LLC as they arose, or only on the distributions he received (i.e., was the LLC transparent or opaque for UK income tax purposes)?

The First Tier Tribunal ("FTT") held that, as a factual matter based on the Delaware LLC Act and provisions of the LLC agreement, it was the Member's share of the profits of the LLC which was subject to UK tax and so he was entitled to double tax relief. However, this was overturned in the Upper Tribunal ("UT"), which decision was subsequently followed by the Court of Appeal ("CoA"). The UT and CoA found...