United Kingdom Tax: First-Tier Tax Tribunal rules Delaware LLC resembles partnership

On 22 February 2010, the U.K. First-Tier Tax Tribunal ruled in favor of an anonymous taxpayer in Swift v. Commissioners for HMRC, finding that, under the facts presented, a Delaware limited liability company (LLC) more closely resembled a partnership for U.K. tax purposes, thus entitling an individual member to double tax relief. The long-standing view of the U.K. tax authorities (HMRC) and many tax advisers has been that an LLC is a body corporate.

The case concerned an individual member (designated as "Swift") of a private equity house (Sandpiper Partners), a Delaware LLC. The issue was whether Swift was entitled to double taxation relief under the 1975 and 2001 U.K.-U.S. tax treaties for U.S. taxes paid on Sandpiper's profits, his share of which was taxed to him personally in the U.S. on the basis that, for U.S. tax purposes, Sandpiper was a transparent entity. In the U.K., the HMRC contended that Sandpiper was a corporate entity that had paid the equivalent of a dividend, and so Swift could not claim double tax relief beyond any withholding tax.

While the Tribunal stated the issue could be framed as one of the transparency versus the opacity of the LLC, the Tribunal followed the treaty language, framing the issue as whether Swift was entitled to the profits as they arose – as would generally be the case with a transparent entity and would entitle Swift to a credit on the U.S. taxes he had paid.

The Tribunal decided that the effect of Sandpiper's particular organization agreement and Delaware law meant that the members were entitled to the profits as they arose. While Sandpiper was somewhere between a Scottish partnership and a U.K. company, it fell on the partnership side of the line as far as income was concerned (with the Tribunal considering that that the entitlement to profits as they were earned as overriding all other factors). Swift was therefore entitled to credit for the U.S. taxes paid by him. The Tribunal stressed that this conclusion depended on the precise form of Sandpiper's organization agreement.

The tax authorities have not yet made any comment on the case, which is not binding on other taxpayers or the HMRC because it is a decision of the First-Tier Tax Tribunal. HMRC is not expected to change its general practice, which has been its view for over a decade. However, individual members of Delaware LLCs may wish to consider whether they can claim double tax relief (e.g. through re-filing returns within the filing window or, if the filing window is closed but an inquiry is open, by requesting the HMRC officer to take the case into account in the closure notice). It is also possible that the reasoning could apply to LLCs formed under laws other than Delaware.