HMRC internal manual

International Manual

Foreign entity classification for UK tax purposes: Factors to consider in classifying a foreign entity for UK tax purposes

You should check the other guidance available on GOV.UK from HMRC as Brexit updates to those pages are being prioritised before manuals.

When considering the classification of a foreign entity (i.e. whether it is either opaque or transparent) for UK tax purposes, due regard is given to the approach of the Court of Appeal in the case of Memec plc v CIR (70 TC 77) and the line of case law that precedes it.

In particular, the following matters should be considered:

  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 debts incurred as a result of the carrying on of 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?

Some of those factors may point in one direction; others may point in another. An overall conclusion is reached from looking at all the factors together, though some have more significance than others. Particular attention is paid to factors 3 and 4.

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.

If you are being asked to treat a foreign entity differently from the general view set out in INTM180030 or the foreign entity is not listed in INTM180030 you should submit the case to CSTD Business, Assets & International Base Protection Policy team as detailed in INTM180020 for advice.