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HMRC internal manual

Double Taxation Relief Manual

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Double Taxation Relief Manual: Guidance by country: United States of America: Scope: fiscally transparent persons from 2003

Article 1(8) of the new UK/USA Agreement provides that income derived through a person that is a fiscally transparent entity under the laws of either the US or the UK will be treated as the income of a resident of a contracting state, if the taxation laws of either country treat it as such. So treaty benefits will be available to the resident of either the US or the UK, not the fiscally transparent entity.

The new rule addresses problems presented by fiscally transparent entities such as partnerships and certain estates and trusts that are not taxed at the entity level but rather are taxed at the level of partner or trustee.

The provision applies to any resident of the UK or US who is entitled to income derived through an entity that is treated as fiscally transparent under the laws of either State. In the US this will include, for example,

general partnerships;

limited partnerships (LPs);

limited liability partnerships (LLPs); and

US limited liability companies (LLCs) that are treated as partnerships for US tax purposes.

In the UK it includes all partnerships, including UK LLPs, and certain trusts.

Example

UK interest is paid to a US limited liability company. Treaty benefits will be available to the extent that US tax law treats a US resident as deriving that income. Entitlement to treaty benefits is dependent on various criteria such as residence, being a qualified person, and satisfying the particular conditions in the relevant income article.

The new rule does not impose a “subject to tax” test in addition to the test contained in the various income articles for obtaining benefits. It simply looks through fiscally transparent entities to the ultimate beneficial owners of the income and asks the questions relating to entitlement of them rather than of the transparent entity.

The Exchange of Notes sets out rules for taxing income, profits or gains:

preserving the right of both States to tax income, profits or gains derived through a fiscally transparent person under the respective domestic laws of each State;

providing that where both contracting states consider an item of income, profit or gain to have been derived by one of their residents, both States can tax that person in respect of the item of income, profit or gain;

(in the UK) treating some items of income, profit or gain arising to a person as falling within the paragraph where another person is charged to UK tax in respect of them under specific anti-avoidance legislation.

The relevant UK domestic law is specified in the Note.

US LLCs - relief for US tax

There is no difference in substance between Article 23(2)(b) of the previous treaty and Article 24(4)(b) in the new treaty. Relief for underlying tax will only be available to a UK company which has at least a 10% interest in the US LLC.

This is because, as indicated at DT19853A, the Revenue take the view that for UK tax purposes LLCs should be regarded as taxable entities and not as fiscally transparent. Accordingly, the UK taxes a UK member of an LLC by reference to distributions of profits made by the LLC and not by reference to the income of the LLC as it arises. If tax is paid in the US on the profits of the LLC - and irrespective of by whom that tax is paid - the UK regards that tax as underlying tax. Credit is available for it if, and only if, the member is a UK company which controls, directly or indirectly, at least 10% of the voting power of the LLC.

It follows that relief for underlying tax is not available to an individual UK member of an LLC. This is consistent with the purpose of the elimination of double taxation provisions contained in the previous treaty at Article 23.