HMRC internal manual

Double Taxation Relief Manual

DT19853A - Double Taxation Relief Manual: Guidance by country: United States of America: United States limited liability companies

Generally speaking, United States federal income tax is charged on the profits of United States limited liability companies (LLCs) on the basis that they are fiscally transparent, that is, tax is imposed on the members of the LLC and not on the LLC itself.

However, for the purposes of United Kingdom tax we have taken the view in relation to those LLCs that we have so far considered that they should be regarded as taxable entities and not as fiscally transparent. Accordingly, we tax a United Kingdom 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 United States on the profits of the LLC, we regard that tax as underlying tax (INTM164010)) and credit relief is available for it if the member is a United Kingdom company which controls, directly or indirectly, at least 10 per cent of the voting power in the LLC. As indicated in DT19851A, there is no difference in substance between Article 23(2)(b) of the old Agreement and Article 24(4)(b) in the new Agreement. Relief for underlying tax will continue only to be available to a UK company which has at least a 10% interest in the US LLC.

If an LLC derives income from the United Kingdom, the question arises of whether it is entitled to claim relief from United Kingdom tax under the agreement. A key issue is whether, under the conditions laid down in the agreement, which in this respect does not follow the approach of the OECD Model (DT153), the LLC can be said to be a resident of the United States. In our view an LLC cannot be said to be a resident of the United States within the terms of the agreement: it is not a United States corporation, nor is it a person resident in the United States for the purposes of United States tax (because the United States taxes the profits of an LLC not on the LLC itself but on its members).

However, we decided as a matter of practice that, in order to relieve double taxation under the agreement where tax would otherwise be imposed on the same income both in the United Kingdom and in the United States, we will accept claims to relief from United Kingdom tax under the agreement from an LLC, but only to the extent that the income in question is subject to United States tax in the hands of those members of the LLC who are residents of the United States. Subject to the same condition, we will pay a full tax credit to a United States LLC, less the 15 per cent deduction provided for by Article 10(2)(a)(ii) of the agreement.

Under the new Agreement, this practice is formalised by Article 1(8). The provision 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. In those circumstances, treaty benefits will be available to the resident of either the US or the UK, not the fiscally transparent entity.