US LLC - anomaly in UK and US treatment

US LLC - anomaly in UK and US treatment

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A client mentioned at their annual meeting that they have set up a US LLC to receive US remittances since it is simpler.  They have engaged a US accountant for the US taxes and the LLC is set up in a low tax state. (Not Delaware, may have been Wyoming. I am waiting for details.)

My concerns are as follows:

- The Directors are selling their services from the UK which I advised brings the LLC's profits onshore.  Therefore the US LLC likely has a UK PE or may even be UK resident since an LLC is a corporate for UK tax purposes.

- The UK would therefore have first taxing rights on the LLC's profits.  Since the LLC is transparent for US tax purposes it is the 2 shareholders (same as Directors) who are taxed in the US so is there a foreign tax credit for any UK tax paid?

- How is income from the US LLC include on the Directors' UK returns - as foreign dividends with underlying tax relief?  But UK tax is not a foreign tax (hopefully no US tax as hoping FTC relief for UK tax paid on LLC UK profits).

Anyone else had this issue? I have done some initial research but most cases relate to non-doms and do not have the added UK PE issue.

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By User deleted
23rd May 2015 10:25

Anson

You should have a look at that case - currently awaiting a decision from the Supreme Court (HMRC have so far successfuly argued that there is no credit available in respect of the dividends, because although the individuals are assessed to US tax the tax is still a charge on LLC profits, whereas the UK tax is a charge on the individuals' income (dividends). By the same token, though, I would expect there to be double tax relief for tax charged ar the corporate level.)

As things stand, instinctively I would say that in your case if there is a PE in the UK (I'm not convinced that there is) profits will be taxed in UK and possibly in US but with credit in US for UK tax. Dividends will be taxed in UK with no relief.

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By Marion Hayes
23rd May 2015 10:13

Elections in US

Have you checked what elections the US accountant has made?

An LLC can be elected to be treated as a partnership, (default I think), an S corporation or a C corporation. The US tax treatment follows on from that election/status. In my past experience, which may well be out of date now, the election determines the transparency which determines the UK tax treatment.

David Treitel is probably best placed to tell you how that currently transfers over here to the UK position but I think we need more information as to the structure etc. Are the Directors members of the LLC or is it owned by the UK Company? Are the services supplied to the LLC and sold on, or are they LLC contracts with the performance in UK or US

etc etc

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By Matrix
26th May 2015 08:54

Thanks both

BKD - Thanks I saw that case and it concerns me. Why do you think that there isn't a UK PE?

Marion - I have not received anything from the US adviser yet regarding check the box elections but my understanding is that it is a partnership (so either default or elected to be treated as a disregarded entity) as nil tax returns have been submitted for the partners.  The LLC's partners are the same Directors/shareholders as the UK Ltd but it does not own the LLC. The LLC contracts are probably performed by the UK company (want to check the US adviser is aware of this) and there are shared services.

The UK Ltd markets US real estate and receives commissions.  The US LLC has a US bank account since it is easier to receive the money.  The sales are performed in UK so thus I think this brings profits onshore.

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By Matrix
29th May 2015 12:42

Any more thoughts on this please?

The LLC could pay the UK company a fee.  However I am still concerned about the UK PE.

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By User deleted
29th May 2015 12:45

I didn't say that there isn't a PE

Just that there wasn't enough info to persuade me that there definitely is one. If you're happy that the circumstances are such that the conditions for a UK PE are met, I'm not going to argue.

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