Recent Developments Regarding Entity Classification for UK Tax Purposes: Anson v. HMRC – is a Delaware LLC “tax-transparent”?

Sullivan & Cromwell LLP - August 24, 2011

The question as to whether a non-UK entity such as a Delaware limited liability company (“LLC”) should be treated as transparent or opaque for UK tax purposes can make a significant difference to the amount and timing of tax incurred by a UK taxpayer investing in it. The UK Upper Tribunal has now reversed the 2010 first instance decision (reported as Swift v. HMRC TC00399: see our client memorandum dated 31 March 2010) and has concluded that a Delaware LLC should be treated as opaque for UK foreign tax credit purposes.  The decision creates economic double taxation.  The LLC in this case does not seem to have had any particularly unusual features.

The decision itself may be further appealed by the taxpayer but it clarifies the income tax treatment of a UK investor in a LLC.  There are also other long-standing questions on the UK treatment of non-UK entities, such as whether inserting a LLC in a corporate chain can disrupt a UK tax “group”, and the decision may be relevant to these.

This memorandum sets out some of the issues that a UK taxpayer considering an investment in a LLC will need to consider by reference to the decision in this case. UK taxpayers face similar issues when considering investment in other non-UK entities that are not clearly equivalent to companies formed under English law.