Posted by Nick Day on 24 Jun 2013
UK Tax Residents – Beware of US LLCs!
Here at Tax Innovations, we often get new clients who own business or personal financial interests outside the UK. For UK domiciled and UK resident individuals who file their UK tax returns on the “arising basis” i.e. who need to report world-wide income and gains, you would expect the position to be relatively straightforward, with the non-UK income reported on the UK tax return, and a credit claimed for foreign taxes paid.
However, we have come across several cases now where such individuals own interests via US Limited Liability Companies (LLCs), and this can have an extremely detrimental impact on the UK tax position of the individuals concerned.
The problem stems from a mis-match in the US and UK tax treatment of US LLCs. In the US, LLCs are normally treated on a transparent “look-through” basis, meaning that individual members are taxed on their share of underlying profits made as if they are in a partnership. Often, on-going profits are distributed to the members on a regular basis.
However, the UK will not treat the LLC as transparent, and therefore distributions received will normally be treated as company dividends. That would not be too problematic if credit could be claimed against the UK tax liability for the tax paid by the individual on the underlying profit of the LLC in the US. But the view of HM Revenue & Customs (and supported so far by UK law court decisions such as Anson v HMRC – also known as “the Swift case”) is that no tax credit relief is due under the US/UK Double Tax Agreement, meaning that genuine “double taxation” can arise. In the court case mentioned above, the overall combined tax rate paid in the US and the UK was an eye-watering 67% as a result of this treatment.
For those that are UK tax resident but non-domiciled, it may be possible/beneficial to file UK tax returns on the “remittance basis”, in which case the LLC distributions received would only be taxable to the extent that they are remitted to the UK. For more information and guidance on domicile/residence issues, please click here.
We certainly recommend that UK tax residents with interests in US LLCs review their affairs to see what options they have to mitigate the problem, and that US individuals moving to the UK review the position well in advance of becoming UK tax resident.
As ever, the position is complex and the above comments are only a general guide to the issue and no substitute for a full review of the actual facts and circumstances by a qualified adviser.
If you would like any advice regarding the above article or would simply like to discuss other ways in which we could help you or your business, please contact us on 01962 856 990 or firstname.lastname@example.org.
- Property Partnership Incorporation and SDLT
- Non-Resident Landlords – UK Tax Update
- Tax Relief For Residential Mortgages
- UK Property Sales: Capital Gains Tax for Non-Residents
- Top 10 Expat Tax Tips for Individuals Moving to the UK