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The Court of Appeal has now confirmed the decision of the Upper Tier Tribunal in Anson –v- HMRC, a case dealing with the issue of whether a Delaware Limited Liability Company was tax transparent or not.

Mr Anson was a member of a Delaware LLC which carried on business in the US. Since a Delaware LLC is considered to be tax transparent for US fiscal purposes, he was taxed in the US on his share of the profits as if the LLC was a partnership rather than a company.

The question was whether he could use the UK/US double tax treaty to claim credit for the tax paid in the US against UK income tax on his profits under the double tax treaty.

That depended upon whether it could be said that Mr Anson’s source of income was the same for US and UK tax purposes. In the case of the US, the source was the trade of the LLC. The question was, therefore, whether this trade was also the source of his income for UK tax purposes or whether the source was the LLC agreement.

In confirming the Upper Tier Tribunal’s decision that Mr Anson’s source was his interest in the LLC rather than its trade, the court focused on whether he had a right to the profits of the LLC at the time when they were created or whether he was merely entitled to distributions made out of them. In coming to the latter conclusion, it placed reliance on the fact that the cash generated by the profits belonged to the LLC until it was distributed and that it was the LLC and not its members which carried on the business. The latter point distinguished the LLC from Scottish partnerships where, although the entity has a legal personality separate from its owners, the partners are regarded as carrying on the business itself in common with each other.

In holding that the profits of the LLC did not belong to its members, the court effectively endorsed the long-standing HMRC practice of regarding an LLC as opaque. It is not yet known whether Mr Anson will obtain leave to appeal to the Supreme Court.

Mr Anson has already paid 45 per cent tax in the USA on the company’s profits. He must now pay a further 22 per cent tax in the UK on his distribution.

This ruling underlines the need for participants in US LLCs – whichever state they are established – to take great care how they structure the constitution of the company. Delaware LLCs are a commodity product sold on the “pile them high and sell them cheap” basis with standard constitutions. This, together with the fact that if they do no business in the US they pay no US tax, makes them attractive to people who wish to “save some tax”. Unfortunately if they are not properly constituted and managed it is too easy for owners to find themselves involved in tax evasion (illegal) and even when they try to run them openly and honestly like Mr Anson they can find themselves liable to pay tax twice on the same income.

If you have or are considering establishing a Delaware or other offshore company do seek appropriate professional advice from an offshore tax specialist. For further information please contact postmaster@jamesgreenandco.co.uk

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