UK offers little clarity on LLC tax treatment

HMRC issued guidance stating that the UK tax authority will determine the tax treatment of US LLCs on a “case-by-case basis,” in effect prolonging tax uncertainty for UK professionals with stakes in LLC structures in the US.

The guidance follows a controversial UK Supreme Court July ruling, HMRC v Anson, in which the court held that George Anson – director of HarbourVest’s UK operations and a non-domicile UK taxpayer – was entitled to claim double taxation relief against his UK tax liabilities for US tax paid on his share of profits in HarbourVest's US business, a registered LLC in Delaware.

The Supreme Court’s finding was contrary to a prior court ruling and HMRC’s generally accepted practice, which interpreted US LLCs as tax opaque and Anson’s remitted income as dividends, and thus subject to UK tax.

There had been some anticipation that the ruling would prompt HMRC to reverse its typical interpretation and view US LLCs as tax transparent. However, the tax authority said in its guidance that the decision was “specific to the facts found in the case” and that individuals claiming double taxation relief based on the decision would be “considered on a case by case basis,” according to a policy paper published last week.

“HMRC has taken the view that the deciding factor in Anson was the LLC agreement and not the Delaware law itself, and as a result the case does not necessarily have wide relevance to other LLCs,” noted a Morgan Lewis client alert on the issue.

The Supreme Court ruling backed a First Tier Tribunal decision which had originally ruled that Anson owned the profits as they arose under the LLC agreement, making the entity transparent and thus covered by a US-UK double tax treaty. On appeal, a higher tribunal in 2011 disagreed, saying Anson would only own the company’s profits as they were earned if he directly owned an interest in the company’s underlying assets.

“What is now clear is that planning for use of a US LLC where UK members are involved requires careful attention,” the Morgan Lewis alert noted. “Where tax transparent treatment in the United Kingdom is required, the safest path may still be to use a limited partnership – the accepted practice before the Supreme Court’s decision in the Anson case.”