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June 14, 2013
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UK Tax Treatment of US LLC Entities

A US Limited Liability Company (LLC) is treated as a partnership for United States tax purposes.  That is, a US person who is a member of the LLC has a direct interest in the LLC’s assets and activities.

However, the tax treatment of an LLC for UK tax purposes has been debated.

The ongoing test case is George Anson v HMRC (also known as Swift Case), which was found in favour of HMRC in the Court of Appeal in February 2013.  It was found in favour of HMRC in that it was held that US LLC’s are opaque for UK tax purposes,  in essence akin to a company for UK tax purposes.  The reason for this decision was primarily because the LLC could make its own decisions, independent of its members.

We have advised a client in the past months who is a member of a US LLC.  The LLC was a holding entity, rather than running a business itself, which is perhaps a common use for such entities.

The UK resident taxpayer has received a substantial amount of monies from the LLC.  The Anson verdict suggests that the monies received will be treated as a dividend, as opposed to a capital disposal, if the LLC is treated as a partnership.  This is detrimental because a capital disposal (as partnership entity) would mean a lower rate of tax (given additional tax rates for income) and no base cost can be applied to the disposal.

Whilst not relevant to our client, the decision could also impact the amount of double tax relief available - where the LLC is treated as an opaque entity any foreign tax paid is likely to be treated as underlying tax and individual taxpayers are unlikely to obtain credit in the UK for the foreign tax paid.

We await to hear whether George Anson will attempt to appeal the latest court decision and we are to review the terms of our client’s LLC constitution to decide how similar it is to Anson.

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