UK Taxation of Non-UK Entities: HMRC Responds to UK Supreme Court Ruling that a Delaware LLC Is “Tax-Transparent”

Sullivan & Cromwell LLP - 29 September 2015

Whether a non-UK entity such as a Delaware limited liability company is 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 Supreme Court recently reversed the decisions of the Court of Appeal and the Upper Tribunal that a Delaware LLC should be treated as opaque for UK foreign tax credit purposes, finding that it should be treated as transparent.  This was the first time the UK’s most senior court had ruled on tax “transparency” issues.  The LLC in this case does not seem to have had any particularly unusual features.  Nonetheless, HM Revenue & Customs has now issued guidance in response to the judgment in which it takes the view that the decision was specific to its facts: HMRC will generally continue its treatment of US LLCs as opaque.  For most corporate taxpayers this will be a welcome re-affirmation of what had long been thought to be the position.

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