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You may have come across US tax practitioners who advise on issues such as ‘check the box’ for their US clients and ask whether UK limited companies are tax transparent. What is the position when the roles are reversed: that is, when a UK person either invests in a US LLC that is tax transparent for US tax purposes, or is a member of a Jersey limited liability partnership?


The nature of the income derived by a UK resident who is a partner in a foreign entity will generally depend on whether, under the foreign country’s domestic commercial laws (as distinct from its tax legislation), the UK resident is entitled to share in the entity’s profits as they arise (similar to a UK partnership) or only when they are distributed (similar to a dividend).

Case law

The leading case is the Court of Appeal’s decision in Memec PLC v CIR [1998] STC 754. In this case, under the terms of a German silent partnership, a UK company had a contractual right to receive the majority of the income of the partnership, which consisted of dividends from subsidiaries. The features of a German silent partnership were distinguished from those of an English or Scottish partnership and it was held that the silent partnership was not transparent for UK tax purposes, so that the dividends from the subsidiaries could not be treated as being received by the UK company directly. On the other hand, the amount received by the UK company was not itself a dividend from the silent partnership, but a contractual payment from the German partner. The result was that double tax relief was not due for the German tax suffered by the subsidiaries. The case developed the concept of a ‘transparent’ entity and HMRC now classifies entities as either ‘transparent’ or ‘opaque’ for UK tax purposes.

It was recently confirmed by the Court of Appeal in HMRC v Anson [2013] STC 557 that a Delaware LLC, which was tax transparent for US tax purposes, should be regarded as opaque for UK tax purposes.

HMRC guidance

Following Memec, HMRC issued guidance on the factors to be considered in classifying a foreign entity for UK tax purposes (now in HMRC’s International tax manual at INTM180010). This states that when considering whether a foreign entity is to be treated as opaque or transparent, it is the approach of the Court of Appeal in Memec and the preceding line of case law that should be taken into account. HMRC considers that the following factors are relevant:

  1. Does the foreign entity have a legal existence separate from that of the persons who have an interest in it?
  2. Does the entity issue share capital or something else which serves the same function as share capital?
  3. Is the business carried on by the entity itself or jointly by the persons who have an interest in it that is separate and distinct from the entity?
  4. Are the persons who have an interest in the entity entitled to share in its profits as they arise; or does the amount of profits to which they are entitled depend on a decision of the entity or its members, after the period in which the profits have arisen, to make a distribution of its profits?
  5. Who is responsible for the debts incurred as a result of carrying on the business: the entity or the persons who have an interest in it?
  6. Do the assets used for carrying on the business belong beneficially to the entity or to the persons who have an interest in it?

Not all factors will point to the same conclusion and an overall view must be taken. HMRC’s view is that some factors have more significance than others and particular attention should be paid to points 3 and 4. HMRC also points out that ‘in considering these factors, we look at the foreign commercial law under which the entity is formed and at the internal constitution of the entity. How the entity is classified for tax purposes in any other country is not relevant. The conclusion that is reached is then used in considering the relevant piece of UK tax law.’

HMRC classifications

A list of classifications of certain foreign entities for UK tax purposes is published at INTM180030. This list gives the HMRC’s general view as to the treatment of the specified foreign entity. It is noted at INTM180020 that regard may also need to be had to the specific terms of the UK taxation provision under which the matter requires to be considered, the provisions of any legislation, articles of association, by-laws, agreement or other document governing the entity’s creation, continued existence and management, the terms of any relevant double taxation agreements and any significant changes in the relevant foreign law.

Taxation of foreign entities

Entities are described as fiscally ‘transparent’ or ‘opaque’ solely for the purposes of deciding how a member is to be taxed on the income they receive from their interest in the entity.

If an entity is transparent, UK resident members will be subject to tax as profits or gains arise in the entity. In the case of an opaque entity, the member is generally taxed only on the distributions made by the entity, subject to anti-avoidance rules such as the controlled foreign companies legislation for companies and the transfer of assets abroad rules for individuals contained in ITA 2007 Chapter 2.

If a US LLC is transparent in the US and opaque for UK tax purposes, the members are charged to US tax on the profits made. Distributions paid to UK corporate members may be exempt under the provisions of CTA 2009 Part 9A but, if the distribution is non-exempt, a credit for the US underlying tax will be available under TIOPA 2010 s 57 if the conditions for the relief are satisfied. The position for individuals is more complicated, as they will be subject to full UK dividend income tax with no credit for US underlying tax other than the 10% dividend tax credit under ITTOIA 2005 s 397A et seq, and therefore an element of double taxation arises.