A UK resident member of a Delaware limited company will have to pay 67% tax on his very substantial profits after failing to convince the Court of Appeal that he is a victim of double taxation. Having already been taxed at a rate of 45% by the US fiscal authorities, Her Majesty’s Revenue & Customs (HMRC) are now entitled to another 22%.
The company was treated as ‘tax transparent’ under US tax laws, in that its profits were treated as the profits of its members for fiscal purposes. At the time that the relevant profits arose, the businessman was resident, although not domiciled, in the UK for tax purposes. He was liable to pay UK tax on any income remitted to the UK and HMRC argued that included his share of the company’s profits.
The businessman’s lawyers argued that he was entitled to relief under the UK/US Double Tax Convention. However, HMRC submitted that the relevant profits represented income received by him from his investment in the company and that these were distinct from the profits made by the company itself.
Dismissing the businessman’s appeal against a decision of the Upper Tribunal (UT) to like effect, the court ruled that the relevant test for determining whether a person is taxed on the same profits or income in both jurisdictions is whether the source of the profits or income in each jurisdiction is the same.
Where the taxpayer became entitled to the profits of an entity because of some contractual arrangement to which he is a party, he must show that the contract is actually the source of the profit, rather than a mechanism to secure a right to a profit derived from another source. The court noted that this will in general mean that the taxpayer has to show a proprietary right to the profits. The UT had been right to rule of the particular facts of the case that the profits generated by the company did not belong to its members.