UK – US corporate joint venture – Choice of vehicle
UK Co. operated a share registration business in the UK. US Bank had a similar business in the US. UK Co. and US Bank intended to form a JV to which each would contribute its share registration business. The JV vehicle was to be either a UK company registered in England and Wales or a Delaware Limited Liability Company (LLC). UK Co. and US Bank were each to own 50 per cent of the JV vehicle. The choice was to be determined, in part, by the JV vehicle’s tax treatment.
Under the laws of the US an LLC is fiscally transparent, which means that tax is imposed only on the members of the LLC who are deemed to receive a share of the LLC’s profits as they arise. By contrast, for UK tax purposes LLCs were regarded as taxable entities and not fiscally transparent. Accordingly a UK resident member of an LLC would be taxed in the UK on any distributions of profits actually made to it by the LLC, and not by reference to the income of the LLC as it arises. As the LLC is not a UK resident company, the distribution received by UK Ltd would be subject to UK corporation tax.
A detailed memorandum, including illustrative calculations, was prepared analysing the tax consequences of the use of either JV vehicle from the point-of-view of UK Co. and US Bank, taking into account the provisions of the US/UK Double Taxation Treaty of 24th June 2001.
Update (at October 2015)
In February 2010 the First-tier Tribunal decided that a Delaware LLC was fiscally transparent for UK tax purposes. Its profits therefore belonged to the members as they arose and the UK members were to be taxed accordingly. Matters did not rest there. HMRC appealed the decision and, in the meantime, continued with its practice which was, as explained above, to tax a UK resident member of an LLC on the profits of the LLC only when those profits were distributed.
In August 2011 the Upper Tribunal reversed the decision of the First-tier Tribunal. The Upper Tribunal concluded that a Delaware LLC was not transparent for UK tax purposes. The profits on which tax had been paid in the United States were the profits of the LLC, albeit attributed to the members for US tax purposes. A contractual obligation to credit and distribute the profits to the LLC’s members did not make them the members’ profits. Somewhat confusingly the UT’s decision was reported as HMRC v George Anson, (the earlier decision having been anonymised to Swift). The decision of the Upper Tribunal was upheld by the Court of Appeal in February 2013.
The taxpayer’s appeal to the Supreme Court was successful. In a judgement issued on 1 July 2015 the Supreme Court decided that the Delaware LLC was fiscally transparent and therefore Mr Anson was entitled to double tax relief on his share of its profits when they arose to the LLC.
The First-tier Tribunal (in the form of John Avery-Jones CBE and Ian Menzies-Conacher) had been right all along. Shame it took over five years to come to this conclusion.
Having lost the case and the Supreme Court having determined as a matter of law that their approach was wrong, HMRC issued a Revenue and Customs Brief on 25 September 2015 saying that ‘after careful consideration’ they will continue to treat US LLCs as companies and will continue their existing approach regarding US LLCs. After all, what do the Supreme Court know?
At the time of publication this case study was technically accurate however, as tax law and practice change rapidly, you should take specific advice before taking any action.