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 1BUK 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