LLCs are a popular structure for US businesses due to their default flow-through tax treatment and limited liability protection. In contrast, HMRC typically treats US LLC’s as corporations, creating a mismatch that can cause issues for UK residents holding interests in them.

This article is the first in our new series on US Limited Liability Companies (‘LLCs’). Here, we explore the tax implications of the allocation and distribution of profits by US LLCs, and highlight key considerations for claiming double tax relief (DTR) in the UK.

The mismatch problem  

Why does the mismatch in treatment between the IRS and HMRC potentially cause problems for UK residents holding an interest in LLCs? This is best presented through an example.  

A US taxpayer, John, moves to the UK and becomes UK tax resident. John owns and operates a business as a sole member US LLC which enjoyed profits of $1,000,000.  

The LLC is considered a disregarded entity for US tax purposes and John is therefore taxed on his profits as they arise. However, for UK tax purposes, the distributions John takes from the LLC are taxed as a dividend.   

For DTR to be claimed under the US/UK double tax treaty, the tax must be ‘computed by reference to the same profits, income or chargeable gains’ as the US – meaning the income being taxed must be of the same nature -this is where the issue arises.   

HMRC’s position is that the amounts subject to tax are not of the same nature. HMRC views the LLC as a separate legal entity to John for U.K. tax purposes, and the income in the UK is via a distribution. The IRS views the income as an allocation of profits: therefore DTR is not available.  

In an overly simplified scenario this may result in an effective tax rate of c.62%. This is before considering any State Taxes or the foreign exchange position. 

The Anson case  

The ability to claim DTR on distributions of profit from a US LLC was litigated in the case of Anson vs HMRC, with the Supreme Court publishing its judgement in 2015.   

In the Anson case, it was broadly tested as to whether a US LLC (specifically a Delaware LLC, HarbourVest Partners LLC), may be considered a flow-through entity for UK tax purposes. If so, it followed that DTR may be available on profits distributed to the UK.  

The key factor in relation to the Anson judgement was whether the members of the LLC were automatically entitled to profits as they arose. The judgement found that the members were in fact entitled to the profits of the business as they arose and therefore DTR could be claimed.  

Key points from the case to consider:  

• The courts demonstrated that they look at the ‘practicalities’ of the flow of funds as a whole. Therefore, an element of discretion by the management of the LLC does not preclude an automatic entitlement to profits in the LLC.  

• It should be demonstrated that the majority of profits in fact have been distributed.  

• The Anson case only considered trading income, it did not consider Capital Gains.  

• Therefore, if the facts in your case align with the LLC in Anson, there may be potential to claim DTR in the UK. In the example above, this would result in an effective tax rate of 45%. 

HMRC’s response  

Unfortunately for UK taxpayers, HMRC’s response to the Anson judgement has anything but added clarity to the situation.   

HMRC issued an updated response in December 2023 (after an initial bulletin in 2015), providing further detail on its position in relation to Anson. In summary, HMRC considers the judgement to be based on the First Tier Tribunals’ ‘…finding of fact on foreign law. As such, it is not binding in subsequent cases.’ It also states that ‘HMRC will consider opening an enquiry or making a discovery assessment in accordance with its normal risk-based approach.’  

This leaves us in a position where there is a Supreme Court judgement which held that DTR may be claimed in certain scenarios, however HMRC has clearly spent a lot of resources in this area. This may suggest that it may be waiting for the ‘right’ case to litigate again. 

Can I claim double tax relief on distributions of profit from a US LLC?  

In light of the above, when the dust settles, it leaves the question of whether a claim for DTR may be made.  

Anyone looking to take an Anson position and claim DTR should take specialist tax advice and carefully review the facts of their position. With favourable facts, an Anson position may be appropriate, but the risk of HMRC raising an enquiry remains high. Whilst the enquiry window is open, you must be comfortable that the position will be uncertain.  

If looking to take an Anson position, it may be appropriate that legal counsel is sought, which in turn comes with increased professional costs.    

How we can help

We have significant experience in analysing the constitutional documents and business practices of LLCs and can provide an opinion on whether an Anson position may be possible.   

Alternatively, we can discuss a broad range of options for restructuring your business for both those who have yet to relocate to the UK, or those currently based in the UK.