The identification of where a company is resident is a critical element in accessing the benefits of a double tax treaty.

GE Financial Investments Limited (“GEFI Limited”) was a UK incorporated and tax resident company and a member of the General Electric group.  GEFI had a sister group company, GE Financial Investments Inc. (“GEFI US”), which was incorporated in the United States.  GEFI Limited and GEFI US were members of a Delaware-established limited partnership.  The shares in GEFI Limited were stapled to the common stock of GEFI US, the result of which was broadly that GEFI Limited was treated as being a domestic corporation for United States federal income tax purposes, and subject to United States tax on its worldwide income.

GEFI Limited received interest income from the Delaware limited partnership.  As GEFI Limited was incorporated in the UK, GEFI Limited was subject to UK corporation tax on its partnership income.  GEFI Limited claimed credit for the United States tax paid on the partnership income in its UK tax returns in accordance with the provisions of the US-UK double tax treaty (the “Treaty”).  The UK revenue authority, HMRC, denied GEFI Limited’s claim for relief under the Treaty for the double taxation it had suffered.

The dispute was heard originally by the UK’s First-tier Tribunal (“FTT”) in June 2021.  The decision of the FTT had been that GEFI Limited was not resident in the United States and, furthermore, that GEFI Limited did not carry on a business in the United States through a permanent establishment situated there.  GEFI Limited had appealed the FTT’s decision to the Upper Tribunal.

Where was GEFI Limited resident under the Treaty?

HMRC argued that GEFI Limited was not resident in the United States for the purposes of the Treaty.  Residence, for the purposes of the Treaty, was argued by HMRC as connoting more than mere taxation on worldwide income by reason of GEFI Limited’s shares being stapled to GEFI US’s stock.

HMRC argued that the concept of “residence,” under Article 4(1) of the OECD Model Tax Convention on Income and Capital, required a “personal” and “territorial” connection between the taxpayer and the taxing state.  Moreover, in the context of the Treaty itself, HMRC claimed that references to “citizenship” and “place of incorporation” in Article 4(1) of the Treaty connoted such a “personal” and “direct” connection.  By contrast, the mere taxation of GEFI Limited’s worldwide income displayed no such territorial or direct connection, as such taxation originated only from the legal stapling of GEFI Limited’s shares to the common stock of GEFI US.

The Upper Tribunal rejected HMRC’s appeal.  The conditions identified in Article 4(1) of the Treaty were, the Upper Tribunal decided, the criteria commonly adopted for the imposition of “full” taxation on income under the domestic law of the relevant contracting states.  The Upper Tribunal saw “no credible basis for an additional requirement for the criteria to be of a direct nature in the form of a legal connection between the corporation and the US.”

The full taxation on GEFI Limited’s income for United States tax purposes was held to be sufficient by itself for GEFI Limited to be treated as resident in the United States under Article 4(1) of the Treaty.  No additional “territorial,” “personal” or “direct” connection between GEFI Limited and the United States was needed.  As a result, the Upper Tribunal determined that double taxation relief was available under the Treaty in GEFI Limited’s UK tax returns for the United States tax which had been paid on the same income.

If GEFI Limited was not resident in the United States under the Treaty, was it carrying on a business through a permanent establishment there?

A second question had been raised on appeal, in the event that the Upper Tribunal had determined that GEFI Limited was not resident in the United States.  That question was whether GEFI Limited was carrying on a business through a permanent establishment in the United States. 

The intention of GEFI Limited was to argue (if it needed to) that United States tax on the income of a United States permanent establishment would be creditable against UK corporation tax in GEFI Limited’s UK tax returns.  Unusually, the parties accepted that some activities were being undertaken by GEFI Limited in the United States – but were such activities sufficient to constitute a “business” for the purposes of the Treaty?

The decision of the Upper Tribunal on this point was obiter dicta.  Nevertheless, the process followed by the Upper Tribunal in considering the meaning of the word “business” (described in earlier case law as an “etymological chameleon”), serves as a highly useful guide to the legislative use of that term. 

The FTT had determined that no business was being carried by GEFI Limited.  All that GEFI Limited did was to hold an interest in the Delaware limited partnership, an activity that the FTT had termed as being “more of a passive, sporadic or isolated activity than a regular and continuous series of activities.”  There had been nothing to suggest that personnel or agents acting on behalf of the Delaware limited partnership had conducted regular and continuous commercial activities in the United States.

The Upper Tribunal did not overturn the FTT’s earlier decision, implicitly concluding that the lower FTT had made no error of law in coming to its earlier decision.  While the tax planning utilised by GEFI Limited was carefully articulated, there are reminders from the case regarding the degree to which partners in limited partnerships can be expected to be treated, for tax purposes, as carrying on a business given their limited liability status.  Whether comparable activities by a member of a general partnership would be treated in the same manner remains a question that was not addressed by the Upper Tribunal.