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Anson: a source of relief or confusion?

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The Supreme Court has decided that a UK resident individual who received distributions from a Delaware LLC would not suffer double (US and UK) taxation and was entitled under the UK/US double tax treaty to credit US tax borne by him on profits of the LLC against his UK income tax.

The keenly anticipated judgment in Anson v HMRC [2015] UKSC 44, which reverses the Court of Appeal, will come as a surprise to many. Long-standing HMRC practice has made clear that, for UK tax purposes, an LLC should be regarded as a taxable entity, and not as fiscally transparent. That view, and the technical underpinnings for it, have been rejected by the Supreme Court.

The decision will no doubt be welcomed by individuals who, like Mr Anson, hold investments in LLCs – a point that may be encountered, for example, when looking to award UK executives with equity incentives in a US group headed by an LLC. One work-around option here has been to consider converting the LLC into a Delaware LP (which HMRC have accepted is transparent). That expedient may now no longer be necessary.

For UK corporation taxpayers, the decision introduces some uncertainty. Corporate investors in LLCs who have treated receipts from the LLC as exempt distributions (rather than, say, trading income) will have to re-examine their position (though given the difference in headline corporate tax rates between the US and the UK, perhaps the UK tax bill for such investors will not be increased). Pension funds and other exempt investors may also have particular concerns. Well-known HMRC guidance allowing LLCs to be grouped may conceivably need to be revisited.

Fortunately, fears that the decision could have had an adverse impact on the transparency of other non-UK vehicles seem to have been allayed. The court expressly downplayed the importance of a member having a proprietary interest (as a UK lawyer would understand it) in an entity’s assets in establishing income transparency – a point that, notwithstanding pragmatic HMRC guidance in this area, has always looked technically challenging when dealing with foreign entities that have separate legal personality (and which may be bodies corporate). Similarly, the decision does not go so far as to treat the LLC as a partnership, and seemingly does not affect the capital gains tax treatment of an LLC investor.

The question under the Treaty is whether the income taxed by the US is the same as the income taxed by the UK. In answering that, the court emphasised the role of Delaware law – the statute and the LLP agreement – as matters of fact for the first instance tribunal. A key point emerging from this was the distinction between profits and assets: while the assets of the business belonged to the LLC, that did not prevent a finding that the members had, as a matter of Delaware law, a contractual right to profits as they arose.

It is, however, not entirely clear whether provisions of Delaware statute (for instance that profits and losses of an LLC shall be allocated among the members) weighed more or less heavily than the drafting of the LLC agreement itself (particularly the articles dealing with profit sharing and distributions). But it seems the possibility, at least, is raised of taxpayers drafting their LLC agreements (under favourable state law) to achieve transparency or opacity, as desired. The advent of such a ‘de facto’ check-the-box regime was one factor in the IRS introducing an elective regime in regulations in the US.

Whether HMRC will consider the time has now come for a UK check-the-box system – and how such a proposal might be viewed alongside the BEPS project’s work on hybrid entities – remains to be seen!

Jonathan Cooklin (jonathan.cooklin@davispolk.comand Dominic Foulkes (, Davis Polk