Anson v Revenue and Customs [2015] UKSC 44

Mr Anson, a UK resident non-domiciled taxpayer, was a member of a Delaware LLC and paid US tax on his share of its profits. The Supreme Court held he was entitled to double taxation relief because UK and US taxes were computed by reference to the same income.

Facts

The appellant, Mr Anson, was UK resident but non-domiciled during the tax years 1997-2004. He was a member of HarbourVest Partners LLC, a Delaware limited liability company carrying on an investment management business in Boston. The LLC was classified as a partnership for US tax purposes, with the result that its members (rather than the LLC itself) were liable to US federal and Massachusetts state income tax on their respective shares of the LLC’s profits, regardless of distribution. Mr Anson paid US taxes at an effective rate of 45% on his 11.5% share of the profits and remitted the balance to the UK.

Under the LLC agreement (governed by Delaware law), the LLC’s profits and losses were credited and debited quarterly to the members’ capital accounts in accordance with their profit shares, and distributions of the excess of income over expenses were made within 75 days of each calendar year-end. The First-tier Tribunal (FTT) heard expert evidence on Delaware law and found, as a matter of fact, that the members of the LLC had an interest in its profits as they arose, and that the profits did not belong to the LLC in the first instance and then pass to the members.

HMRC denied Mr Anson double taxation relief under article 23(2)(a) of the UK/US Double Taxation Convention 1975 (and article 24(4)(a) of the 2001 Convention) on the basis that the income taxed in the US was that of the LLC, not Mr Anson, so UK and US taxes were not computed by reference to the same profits or income.

Issues

The principal issue was whether the UK tax to which Mr Anson was liable was “computed by reference to the same profits or income” as the US tax, within the meaning of article 23(2)(a) of the 1975 Convention (and equivalent provisions of the 2001 Convention and section 790(4) of the Income and Corporation Taxes Act 1988).

This required the court to determine: (i) the correct approach to interpreting the double taxation conventions in accordance with the Vienna Convention on the Law of Treaties; (ii) whether, as a matter of UK tax law and on the facts found, Mr Anson’s income arose as profits were earned by the LLC (so that he was taxed on his share of those profits), or only when profits were distributed to him; and (iii) the proper characterisation of the FTT’s finding that members of the LLC had an interest in profits as they arose.

Arguments

Appellant (Mr Anson)

It was argued that, on the FTT’s findings, Mr Anson was entitled to a share of the LLC’s profits as they arose under Delaware law, so the income on which UK and US tax was computed was the same. A further argument, raised for the first time on appeal, drew on article 23(2)(a)’s express exclusion of underlying tax on dividends, suggesting that the identity of income could not be determined solely by reference to UK domestic tax principles.

Respondent (HMRC)

HMRC argued that the LLC carried on the business and owned its assets, so the profits belonged to the LLC, and Mr Anson’s UK tax liability arose only in respect of distributions made to him from those profits. The source of his income was his contractual/statutory rights under the LLC agreement, distinct from the source of the LLC’s trading profits. HMRC also relied on Memec plc v IRC [1998] STC 754 and submitted that “sources” in article 23(2)(a) should bear its UK tax law meaning.

Judgment

Lord Reed (with whom Lord Neuberger, Lord Clarke, Lord Sumption and Lord Carnwath agreed) allowed the appeal and restored the decision of the FTT.

Treaty interpretation

The conventions were to be interpreted under articles 31 and 32 of the Vienna Convention on the Law of Treaties, giving the terms their ordinary meaning in context and in light of the treaty’s object and purpose. The court traced the legislative history through the 1945 Convention, the 1966 Protocol, and the 1975 Convention, explaining that the parenthetical exclusion of underlying tax on dividends in article 23(2)(a) reflected the abandonment of the UK’s imputation system following the introduction of corporation tax in 1965, and did not displace the requirement that UK and US taxes be computed by reference to the same income. The first ground of appeal was therefore rejected.

“Sources”

The court rejected HMRC’s argument that “sources” in article 23(2)(a) bore the meaning it has in UK schedular tax law. Article 23(3) provided its own rule for determining source, generally by reference to the distributive articles of the Convention, and was unrelated to UK source doctrine. This followed Bayfine UK v Revenue and Customs Comrs [2012] 1 WLR 1630.

Memec

Memec was distinguished. That case had concerned whether dividends paid to a German entity could be treated, under the equivalent of article 23(2)(b), as paid to the UK partner – a question about underlying tax relief on dividends. The present case raised a different question: whether the income on which Mr Anson paid US tax was the same as the income on which he was liable to UK tax.

Findings of the FTT

The Supreme Court held that the Upper Tribunal and Court of Appeal had erred in re-characterising the FTT’s finding. The FTT, an expert tribunal, had clearly understood the conceptual distinction between profits and assets. Its finding that members of the LLC were entitled to the profits as they arose was a finding of fact on Delaware law, based on sections 18-101(8) and 18-503 of the Delaware LLC Act and article IV of the LLC agreement, and was supported by the expert evidence of Mr Abrams. It concerned a right in personam, not a proprietary right in specific assets. The comparison with a Scottish partnership was apt: in a Scottish partnership, the partners have no proprietary interest in partnership assets but do have a right to share in the profits.

Application to article 23(2)(a)

On the FTT’s findings, the profits did not belong to the LLC in the first instance and then pass to the members – the members automatically became entitled to their share of the profits as they arose. Mr Anson’s “income arising” in the US was therefore his share of the LLC’s profits, which was the same income as was taxed in the US. His UK tax liability was accordingly computed by reference to the same income, and he qualified for relief under article 23(2)(a) and, by parity of reasoning, under section 790(4) of the 1988 Act in respect of Massachusetts state tax.

Implications

The decision establishes that, in determining entitlement to double taxation relief under article 23(2)(a) of the UK/US Double Taxation Convention, the critical question is whether the UK tax is computed by reference to the same income as the foreign tax. This is to be answered by identifying the income arising to the taxpayer under the relevant foreign law (a question of fact) and comparing it with the income taxable in the UK.

The judgment confirms that questions about a member’s rights under foreign law are findings of fact, to be determined on expert evidence, while the application of UK tax law to those facts is a question of law. Appellate courts should be cautious before re-characterising an expert tribunal’s findings on foreign law.

The decision is significant for UK residents who are members of foreign entities (such as US LLCs) that are treated as fiscally transparent in the foreign jurisdiction. Whether such a member is entitled to relief from UK tax on income derived from the entity will depend on a careful analysis, supported by expert evidence, of whether the foreign law confers upon the member an automatic entitlement to a share of the profits as they arise, as opposed to a right to receive distributions made out of profits belonging to the entity.

The judgment is limited to its facts. Lord Reed expressly declined to resolve disputes about the precise nature of a Scottish partner’s rights, and the decision does not lay down a general rule that all US LLCs are to be treated as transparent for UK tax purposes – each case will turn on the particular constitutive documents and the applicable foreign law. The case is also a reminder that double taxation conventions are to be interpreted in an international rather than narrowly domestic manner, in accordance with the Vienna Convention.

Verdict: Appeal allowed. Mr Anson was entitled to double taxation relief under article 23(2)(a) of the 1975 Convention (and the analogous provisions of the 2001 Convention and section 790(4) of the Income and Corporation Taxes Act 1988), as the UK tax to which he was liable was computed by reference to the same income (his share of the LLC’s profits) as the US federal and Massachusetts state taxes he had paid. The decision of the First-tier Tribunal was restored.

Source: Anson v Revenue and Customs [2015] UKSC 44