Anson may have profound ramifications for arrangements reliant on US LLCs being opaque or having shares for UK tax purposes, specifically by altering availability of UK tax credits for taxes withheld from LLC profits.
HMRC has since clarified that their decision pertaining to entity classification will only apply in this specific instance and will not alter their general approach to such matters in general.
Profits taxed in the US
The US Supreme Court recently made the ruling that UK residents can claim tax credits for taxes paid on profits earned through Delaware LLCs, although this doesn’t guarantee they all qualify – instead, each LLC’s structure will need to be evaluated on an individual basis by the First Tier Tribunal (FTT) to decide if its operation is opaque or transparent in order for this credit claim to apply.
HMRC Brief 15 (2015) indicates that it will continue to treat LLCs formed under Delaware law as opaque for UK tax purposes and that claims for US tax credit relief will need to be evaluated individually – this could impact anyone with a US LLC who wants to use the UK/US Double Taxation Agreement (DTA).
HarbourVest Partners involved Mr Anson investing in a Delaware LLC that generated profits, and the FTT concluded that, under Delaware law, his interest included entitlement to their profits as they came in; this differed from ownership of assets or cash ownership.
Credit for US tax
Anson v HMRC marked an important legal victory when the Supreme Court determined that members of Delaware LLCs paying US taxes should receive double tax relief under UK tax rules, rather than being treated opaque entities by HMRC for UK taxation purposes.
Anson was a member of a Delaware LLC taxed as a flow-through entity in the US. As such, he was required to pay both US tax on his allocated LLC profit share as well as UK tax on any distributions received from it.
The FTT and Upper Tribunal both ruled in Anson’s favour when they decided that US tax payments should count towards his UK income, while Court of Appeal and Supreme Court disagreed with them. According to the Supreme Court ruling, Anson should receive relief under FTT ruling as his US taxes paid were equivalent.
Double taxation relief
HMRC typically treats US LLCs as opaque entities and denies them credit for taxes paid in the US. This case will have far reaching ramifications for UK members of US LLCs as well as any international entities classified by HMRC as opaque, although the Supreme Court decision only dealt with specific circumstances surrounding Mr Anson’s Delaware LLC agreement and Mr Anson himself.
The FTT held that Mr Anson’s share of profits from an LLC were taxable in the UK due to his membership of it based on terms set out in his membership agreement and provisions of Delaware LLC Act, however this decision was overturned by both UT and CoA.
HMRC remains of the opinion that Delaware LLCs are not fiscally transparent and therefore do not qualify for double taxation relief relief claims by UK residents who earn income through US LLCs. Any claims by UK residents for tax credit relief relating to US LLC income will be reviewed on an individual basis.
HMRC guidance
HMRC recently issued guidance pertaining to the implications of Anson v HM Revenue and Customs Commissioners (2015 UKSC 44). They maintain that LLCs formed under Delaware law will be treated as opaque for UK tax purposes despite HMRC previously taking the position that LLCs should be treated as transparent entities for UK tax purposes; as a result of Anson, HMRC now treats them opaque for UK tax purposes instead. It could mean UK individuals holding interests in Delaware LLCs could be subject to double taxation when receiving distributions from them.
The Supreme Court determined that Mr Anson was entitled to credit for US taxes paid on his share of LLC profits as determined by the FTT, given its finding that such income was taxed under Delaware law and provisions in his LLC agreement. Furthermore, US law distinguishes between profit/loss and assets/liabilities entries on an LLC balance sheet, leading to positive profit/loss entries with negative asset/liability entries on it.
