Small Business Reading Room

Tuesday, July 21, 2015

U.K. Tax Treatment of Delaware LLCs Explained

Good news from across the pond with respect to the double taxation trap!

Earlier this month, the United Kingdom Supreme Court issued a landmark decision which will finally allow U.K. investors to avoid double taxation when investing in the United States through a Delaware Limited Liability Company.

You can read the decision for yourself here:  Anson v. HMRC (2015) UKSC 44  (PDF)

For those of you who just want the low down, and want to skip the legal document review- we've got you covered!

Here's an explanation of the tax problem central to the issue from the Global Delaware Blog:

General Tax Treatment of the Delaware LLC in the EU and the U.K. Tax Problem

For many years, most EU jurisdictions, like the United States, have viewed the Delaware LLC as fiscally transparent for local tax purposes. This distinction has meant that the EU owner of a Delaware LLC would typically treat the income earned by the Delaware LLC as immediately taxable in the owner’s home country. The U.S. tax laws require a multi-member LLC with a foreign owner to withhold a pro-rata amount of U.S. taxes with respect to the net income of the LLC allocable to that foreign owner, regardless of whether or not the income of the LLC is distributed to the owner (i.e., the entity is fiscally tax transparent). In most EU jurisdictions, it has been clear that the U.S. taxes that are withheld should be creditable in owner’s home country (either under the domestic laws of the EU owner or by tax treaty). In other words, most EU jurisdictions treat the income earned by a Delaware LLC as taxable directly to the owner of the LLC rather than taxed to the LLC itself.

The U.K. tax authorities, on the other hand, have routinely frustrated U.S. tax practitioners by claiming that the Delaware LLC (or an LLC in any U.S. state) has attributes that more closely resemble a non-fiscally transparent entity (i.e., a corporation). Thus, the U.K. tax authorities have treated the income earned by the Delaware LLC as taxed at the level of the LLC (like a regular U.S. corporation). Then, when distributions have been made by the LLC to the U.K. owners, the U.K. tax authorities have once again taxed those distributions as “dividends” without providing relief from double taxation. In the case of a typical U.K. corporation or individual investing in the United States through a Delaware LLC, these prior rules have meant that the U.K. investor could be subject to 35-45 percent immediate U.S. federal and state taxation on the LLC’s U.S. “effectively connected” income, plus an additional 20-40 percent U.K. taxation (without a foreign tax credit) when distributions were made to the investor (i.e., taxed as “dividends”). For some U.K. investors, these old rules were said to be favorable because the U.K. investors could defer U.K. taxation until the distribution of income was made, but for most investors, the so-called “deferral” of double taxation (i.e., deferring U.K. taxation after paying high U.S. taxes up front) is rarely better than simply paying one single U.S. tax.

The decision of the U.K. Supreme Court certainly provides clarity and will no doubt help clear the way for those U.K. investors who are looking to use the Delaware LLC as a much more flexible and convenient corporate structure for their business purposes.

You can read more on that analysis in non-legalese writing that anyone can understand here.


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Delaware Intercorp, Inc.
113 Barksdale Professional center
Newark, DE 19711-3258

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