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HMRC internal manual

Business Income Manual

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Business Income Manual: Computing the amount to assess: Mixed Membership Partnerships: Excess profit allocation: International structures

This section looks at how the mixed membership partnership legislation applies to cases where partnerships, and in particular LLPs, form part of structures that cross international boundaries.

 

*Example 1 *

This looks at a case where one member is a tax transparent entity.

*PQR LLP only has individuals as members, so it is not a mixed membership partnership. *

*Rather than have a branch, the members decide to ring-fence a new business venture overseas. They set up FOR LLP, which is a UK LLP whose members are PQR LLP and those individual members of PQR LLP involved in the project, a mixture of individuals resident in the UK and in the country where the firm operates. *

Profits allocated by FOR LLP to PQR LLP are in turn allocated to the members of that firm all of whom are individuals resident in the UK.

FOR LLP is a mixed membership partnership as one of the members is an LLP, which is not an individual. As noted above, the fact that some individual members are non-UK resident does not make it a mixed membership partnership.

However the Mixed Membership Partnership legislation is unlikely to apply. All the profits are allocated to, and taxed upon individual members. In this case the relevant tax amount is not lower as a result of the structure.

 

*Example 2 *

This example looks at where the UK firm is a subsidiary part of a wider global network.

*XYZ LLP is the UK operation of ABC, a global business with substantial operations in a number of jurisdictions. *

*XYZ LLP has a number of individual members and ABC Ltd. *

*ABC Ltd is owned, via one or more intermediate entities, by ABC Inc, the ultimate parent of the global business. *

*ABC Inc is owned by an unconnected external corporate investor and a number of individuals several of whom are also individual members of XYZ LLP. *

As the membership of XYZ LLP consists of individuals and ABC Ltd, XYZ LLP is a mixed membership partnership so that the excess profit allocation rules apply.

The question that needs to be considered is what part (if any) of the profit allocated to ABC Ltd can be said to be attributable to the fact that individual members of XYZ LLP are also amongst the ultimate owners of ABC Ltd?

  • If the members of XYZ LLP have a minority interest in ABC Inc (and assuming they receive only a corresponding minority benefit from ABC Inc’s share of XYZ LLPs’ profit) then this is a strong indicator that the profit allocation is not linked to the fact that the members of XYZ LLP are also members of ABC Inc.
  • If a member of XYZ LLP receives their profit share from ABC rather than XYZ UK LLP then that is an indicator that the excess profit allocation rules will apply.
  • If the members of XYZ LLP receive a priority distribution out of ABC then that is an indicator that the excess profit allocation rules will apply

 

*Example 3 *

This example looks at where a member of the UK firm is rewarded from of an international network.

*DEF LLP is the UK operation of DEF US. *

*The members of DEF LLP are individuals and a company owned by DEF US (DEF Ltd). *

*DEF Ltd receives a profit share from DEF LLP. This is paid by dividend to DEF US. *

*A is a member of both DEF LLP and DEF US. He works in the UK for DEF LLP, but receives no profit share from DEF LLP, only from DEF US. *

*Under the agreement A receives a profit share from DEF US that is 75% of the profit share received from DEF LLP via DEF Ltd. *

DEF LLP is a “mixed partnership” as it has both individual and a corporate member.

A is a member of DEF LLP, working in the UK for DEF LLP but he receives no profit share from that firm, only one from DEF US.

A works for DEF LLP and receives his profit share via the profit allocated to DEF Ltd. The legislation applies, with the result that A will be subject to increased profits under S850C(4).