Dave Mouncey

ETG, Gothenburg

24 September 2010

LLC or not to LLC?

Two UK Tax Cases

• SWIFT v HMRC

• BAYFINE UK v HMRC

Implications for Double Tax Relief under UK/US Treaty

Background in UK

• English Law – partnership not treated as a legal person

– partners taxed on income arising whether or not distributed

Background

• Scottish Law– Partnership is a legal person– But partners still taxed on income arising

LLC – US Tax Treatment

• Transparent (i.e. like a partnership)

• Unless elected to be treated as a corporation

LLC – UK Tax Practice

• HMRC consider them to be opaque entities (i.e. like a company)

SWIFT v HMRC

• Mr Swift (UK resident) taxed in US on share of profits of LLC

• Claimed double tax relief in form of UK tax credit for UK tax

HMRC view

• UK member only taxed on profits when distributed

• Relief from UK tax on tax paid in US only available to UK company controlling 10% or more of LCC

HMRC stated

“the LLC is a corporate entity that has paid the equivalent of a dividend and so Mr Swift has not been taxed on same income in UK”.

HMRC lost the case . . .

• Followed the approach of Memec plc V CIR – that LLC was a transparent entity for UK purposes

Held . . .

“profits belonged to members as they arose and therefore taxable in hands of members”

Bayfine v HMRC

Implications for “check the box” entities in the US

Group structure

BDE

BUK 1 BUK 2

US

UK

• US checked the box treating BUK 1 and BUK 2 as transparent

• HMRC consider no impact on UK tax treatment

Issue

• Was DTR applicable in UK to profits of BUK as result of tax paid by BDE in US?

HMRC argued

• BUK tax resident and therefore had primary taxing rights

Court of Appeal

• Found in favour of tax payer

“Profits of BUK held to be US in origin and this gave US primary taxing rights”

Decision

• Followed National Bank of Greece – source of income more material than residency of Company

Court also held unilateral relief

• Would have been available if DRT not