In a judgment handed down on 1 July 2015, the Supreme Court has overruled the decision of the Court of Appeal in the case of Anson v HMRC  UKSC 44.
The Anson case concerned the availability of relief under the UK/US Double Taxation Convention of 1975 for a UK resident member of a Limited Liability Company (“LLC”) established under laws of the state of Delaware.
Under the US Code, LLCs are typically treated as “transparent” entities, which means that they are treated as if they were partnerships – the members of the LLC will be taxed on the profits of the LLC as they arise (it is possible for LLCs to be treated as non-transparent corporations, but for US taxpayers such a treatment is rarely favourable, meaning that the members of most LLCs elect to treat them as if they were partnerships).
Mr Anson himself was resident in the UK for tax purposes, but not domiciled here, which meant that he was taxed on the remittance basis on any income from the LLC that he was a member of. As is often the case in the US, membership of an LLC brought Mr Anson within the scope of US taxation, which meant that he was taxed on his share of the LLC profits in the US. Once Mr Anson had paid taxes in the US at a rate of 45%, the remaining balance of his LLC profits were remitted to the UK.
This is where his problems started.
HMRC, following the Court of Appeal decision in Memec plc v Inland Revenue Comrs  STC 754, treated LLCs as corporations, arguing that the legal nature of an LLC meant that it was an entity carrying on a trade in its own right, rather than the members of the LLC collectively carrying on a trade.
On HMRC’s analysis, the income derived from the LLC was taxable when the LLC made distributions to its members (analogous to paying a dividend). This meant that, from HMRC’s perspective, the income that Mr Anson was remitting to the UK was not the partnership income that was franked with US tax, but a different type of income, which had not been taxed in the US. For this reason, HMRC sought to deny Mr Anson treaty relief for the taxes that he had paid in the US.
HMRC won their argument before the Upper Tier and the Court of Appeal, which left Mr Anson and other UK members of an LLC with the unattractive prospect of paying US taxes at 45% and then UK taxes on their net LLC income (in the years in question in Anson, that would have resulted in an effective rate of tax of 67%).
The Supreme Court held that Mr Anson was entitled to double taxation relief, on the basis that, as a matter of Delaware law, the members of the LLC were automatically entitled to their share of the LLC’s profits. The distributions from the LLC to its members was not a company looking at what part of its retained profits it could distribute, it was instead the LLC distributing to its members profits that they were already entitled to. On this basis, the income that was taxable in the UK was the same income that had already been taxed in the US, which meant that Mr Anson was able to benefit from the protection of the treaty.
For UK members of US LLCs this judgment clarifies the position and rectifies a seemingly perverse mis-match between the UK and US tax rules.
For further information please contact the TaxDesk on 0845 4900 509 and ask for Thomas Dalby.