James F. McDonough
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732-568-8360 jmcdonough@sh-law.comFirm Insights
Use With Care: Foreign Taxpayers And Transparent U.S. Limited Liability Companies
Author: James F. McDonough
Date: October 29, 2015
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Mr. Anson & the HMRC
Much ado has been made about the use of hybrid entities that are viewed as flow-through (transparent) or disregarded in one jurisdiction but are separate taxpayers or non-transparent in the other jurisdiction.
A United Kingdom (U.K.) resident (Anson) ran his United States (U.S.) consulting business through a Delaware limited liability company. Mr. Anson was personally responsible for and paid income taxes on his U.S. earnings. The Commissioners of Her Majesty’s Revenue & Customs (“HMRC”) sought to impose tax on the remittance to the U.K. and denied Mr. Anson a credit for tax paid to the U.S.
HMRC denial
HMRC denied the credit on the grounds that the remittance was not the same as the income from business profits recognized in the U.S. The HMRC position was that business income is different than remittance which is akin to a dividend. The HMRC position is based upon its view that a limited liability company is a corporation, thus a separate person. Perhaps, this position is overstated as each limited liability company (LLC) is evaluated on facts and circumstances. The income reported in the U.S. was taxed to an individual who is taxed in the U.S. on the profits earned by a transparent entity. The view of HMRC was that the entity did not earn the income and individual members of U.S. LLCs are taxed on profits when earned and not when distributed. Fortunately for Mr. Anson, the U.K. Supreme Court held that he was entitled to the tax credit.
One can anticipate other cases if the U.K. revenue authorities continue to adhere to this position. Under the U.S. – U.K. income tax treaty, royalties paid to a U.K. resident corporation from the U.S. are exempt from withholding if a U.K. corporation does not have a permanent establishment in the U.S. Suppose the U.K. corporation interposes a U.S. limited liability company between itself and the payer. If one extends the position taken in Anson, the royalty would not qualify because the LLC is not a resident of the U.K. and it is not the payer of the royalty. Disputes might arise in other areas, such as withholding on interest, dividends, branch profits as well as the exemption for international transportation.
It is particularly important to note that a tax treaty does not always harmonized the treatment of hybrid entities.
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