Tribunal confirms UK company was also resident in the USA for the purposes of the UK/USA double tax treaty
In GE Financial Investments v HMRC [2023] UKUT 146 (TCC), the Upper Tribunal (UT) has allowed the taxpayer's appeal, confirming its entitlement to double tax relief under the UK/USA double tax treaty.
Background
GE Financial Investments Ltd (GEFI) was a UK resident subsidiary of GE Capital Investments which was in turn a subsidiary of Electric Capital Corporation, a US company.
In 2003, GEFI’s articles were amended so its shares were “stapled” to the shares of a US affiliate incorporated in Delaware, GE Financial Investments Inc (GEFC Inc). Due to this stapling, GEFI was treated as a domestic corporation for US federal income tax purposes and taxed on its worldwide income. GEFI and GEFC Inc formed a Delaware limited partnership in 2003. GEFI held a 99% limited partnership interest. GEFI was taxed in the UK on the interest income it received via the partnership. GEFI also paid US federal income tax on the same interest income due to the share stapling rules.
GEFI sought to claim double taxation relief in the UK for the tax it suffered in the US and filed company tax returns for each of those periods in which it claimed a credit for US federal income tax paid on interest income it was beneficially entitled to as a limited partner in the partnership. The credit was against UK corporation tax paid by GEFI on the same income.
HMRC refused GEFI's relief claims and issued closure notices under paragraph 32(1), Schedule 18, Finance Act 1998. GEFI appealed the closure notices to the First-tier Tribunal (FTT). The relief denied was £124,913,161.86. The appeals concerned the correct interpretation of the UK/USA double tax convention and its application to GEFI for its accounting periods ending 31 December 2003 to 31 December 2008.
FTT decision
The appeals were dismissed.
There were two principal issues before the FTT.
The first issue was whether GEFI was a resident of the US for the purposes of Article 4 of the UK/USA double tax convention (issue 1). If it was, it would be entitled to the double taxation relief it had claimed.
GEFI had amended its articles of association restricting the transfer of its ordinary dollar shares unless all the common stock in GEFI Inc was transferred to the transferee at the same time. A similar amendment was made to the certificate of incorporation of GEFI Inc. In consequence of these amendments, the shares of GEFI were “stapled” to the stock of GEFI Inc. One effect of this stapling was that, for US federal income tax purposes, GEFI was treated as a domestic corporation and was liable to tax in the US on its worldwide income. The FTT held that, despite the fact that GEFI was liable to federal tax in the US, it was not resident in the US for treaty purposes. The share stapling only created a connection between shareholders and did not result in legal rights or obligations for GEFI in the US.
The second issue before the FTT was whether GEFI carried on business in the US through a permanent establishment for the purposes of Article 7 of the UK/USA double tax convention (issue 2(a)). If it did, it would be entitled to double taxation relief in the UK in respect of the US tax payable if, but only if, the UK was required, pursuant to Article 24(4)(a) of the convention, to give relief against US tax (issue 2(b)).
The FTT decided issue 2(a) against GEFI and, having also held against it on the first issue, dismissed its appeal. However, in the event that its conclusion on issue 2(a) was wrong, it went on to consider issue 2(b) and found in favour of GEFI on that issue.
GEFI appealed to the UT in respect of issues 1 and 2(a).
UT decision
The appeals were allowed.
In the view of the UT, GEFI was entitled to double tax relief under the UK/USA treaty and therefore could claim the tax relief which had been denied by HMRC.
The UT disagreed with the FTT's interpretation on the first issue, namely, whether GEFI was a resident of the US for the purposes of Article 4 of the UK/USA double tax convention. The UT concluded that GEFI was resident in the US for the purposes of the double tax treaty as Article 4(1) of the treaty adopted a broad test for residence – whether a person is liable to tax in a Contracting State under domestic law “by reason of” criteria such as domicile, residence, place of incorporation etc. The criteria for residence in Article 4 were all commonly accepted ways in which worldwide or ‘full’ taxation was imposed. The UT could see no basis for the additional requirement imposed by the FTT which was for there to be a legal connection between the company and the US. In the view of the UT, US federal income tax treated a stapled foreign company as a domestic company and subjected it to full taxation. A company treated as resident under domestic law and taxed in full could not conceivably be not resident under the treaty. The UT therefore concluded that GEFI was resident in the US for the purposes of the treaty.
As the UT determined that GEFI was a resident of the US for the purposes of Article 4 of the treaty, that was sufficient for GEFI's appeals to succeed. Although not necessary, the UT went on to consider issue 2(a).
On this issue, the UT concluded that the FTT had considered all the relevant principles established in case law and had not erred in law and therefore the UT agreed with the FTT that GEFI was not carrying on a business.
Comment
This decision is essential reading for anyone involved in USA/UK cross border matters. In particular, the UT's discussion and analysis of the second issue i.e. whether GEFI carried on business in the US through a permanent establishment in the US for the purposes of Article 7 of the UK/USA double tax convention, will be of interest to many taxpayers and their advisers. Given the large amount at stake and the importance of the decision, we would expect HMRC to seek permission to appeal the decision to the Court of Appeal.
The decision can be viewed here.