Important developments for UK taxpayers with interests in US businesses

There have been some important recent developments for UK individuals and companies with US investments, as new reporting requirements took effect and HMRC updated its guidance concerning the tax treatment it applies to certain US entities.

Corporate Transparency Act

Both individuals and businesses that own, or are members of, a US entity, or otherwise operate in the US, should be aware that new requirements under a US federal law – the Corporate Transparency Act (CTA) – became effective on 1 January 2024.  

The CTA aims to create a national database of entities operating in the US and to identify their beneficial owners and the person responsible for filing their formation documents as part of an increasing effort to combat money laundering, terrorism, tax evasion, and other financial crimes.

The CTA requires almost all limited liability companies (LLCs), corporations, limited partnerships, and certain other entities formed and/or operating in the US to report to the US Department of the Treasury's Financial Crimes Enforcement Network (FinCEN).  

For in scope entities that existed on 31 December 2023, the deadline to provide all required information to FinCEN is 1 January 2025. All entities newly formed or coming into scope of the reporting rules on or after 1 January 2024 and before 1 January 2025 will only have 90 days from the date of formation to file all the required information with FinCEN. Entities newly formed or coming into scope on or after 1 January 2025 will have only 30 days from the date of formation or registration to meet this obligation. Additionally, once a reporting company has filed information with FinCEN, it will be required to report any change to the information previously provided within 30 days of the date of such change.  

UK tax treatment of LLCs

UK members of Delaware and possibly other US LLCs should also be aware of updated guidance HMRC published in December 2023.

LLCs are a commonly used entity-type in the US, providing limited liability for owners, but typically akin to partnerships for US tax purposes, such that they are not subject to US corporate income tax. The members of LLCs are instead subject to US taxes on their share of in-scope income and gains of the LLC. HMRC, however, typically views LLCs as opaque entities for UK tax purposes (ie corporate entities taxable in their own right) and over the years, this mismatch has created complexity for UK members of LLCs for a number of reasons, including the risk of double taxation.

Stepping back a little, from 1997 onwards HMRC confirmed that it viewed LLCs as opaque entities, which meant that UK tax would only be assessed on profits distributed by LLCs to their UK members, not by reference to the income as it arises. Consequently, UK double tax relief was not available for any US taxes suffered by UK individual members on the profits of LLCs as they arose.  

HMRC’s position was overruled by the UK Supreme Court in the Anson v HMRC 2015 legal battle, which resulted in a UK member of an LLC (Mr Anson) successfully arguing that, in his case, double tax relief could be claimed for US taxes he had suffered.

However, in December 2023, HMRC produced further guidance which sets out that it continues to believe that the profits of LLCs generally belong to the LLC and not to their members. This means that UK members of LLCs will only be liable to UK tax on distributions of profits from the LLC and, where an LLC is treated as a partnership or is disregarded for US tax purposes, UK individual members will not be entitled to double tax relief or to any tax deduction for US taxes suffered (contrary to what was successfully argued by Mr Anson in 2015).

HMRC also goes on to re-iterate that distributions from LLCs to a UK company may be exempt from UK corporation tax. However, where a UK LLC member meets the requirements to be considered a small company and the US LLC is treated as transparent for US tax purposes, such exemption may not available and instead double tax relief with respect to any US withholding tax suffered and/or underlying tax may be in point.  

HMRC has also stated that where its updated guidance has not been followed, it will consider opening an enquiry or making a discovery assessment.

Action required

We would strongly advise anyone who is responsible for a business with an interest in a US entity, or is a UK member of an LLC, to ensure they understand and take any necessary action to address the impact of the developments outlined above.

For more information, please get in touch with Suze McDonald, or your usual RSM contact.