Background

In GE Financial Investments Limited[1] the Court of Appeal (“CoA”) overturned the Upper Tribunal’s (“UT”) decision and held that double taxation relief was not available under the UK-US double tax treaty (the “Treaty”). We covered the UT’s decision in August 2023.[2]  We have briefly summarised the facts of the case below. GE Financial Investments Ltd (“GEFI Limited”) was a UK incorporated and tax resident company, subject to UK tax on its worldwide income. GEFI Limited had a sister group company, GE Financial Investments Inc. (“GEFI US”), which was incorporated in the US. GEFI Limited and GEFI US were members of a Delaware-established limited partnership (the “LP”). The shares in GEFI Limited were stapled to the common stock of GEFI US. The stapling meant that GEFI Limited was treated for US tax purposes as a ‘domestic corporation’ and subject to US tax on its worldwide income. The question was whether GEFI Limited was also US resident for the purposes of the Treaty; and if it was, the UK tax authority would have to give credit for the US tax GEFI Limited had paid.

The First Tier Tribunal (“FTT”) dismissed GEFI Limited’s appeal, finding that it was neither resident in the US nor carrying on a business in the US through a permanent establishment situated there. On appeal, the UT concluded that the stapling gave rise to "worldwide" liability to tax and that GEFI Limited was resident in the US for the purposes of the Treaty, but agreed it was not carrying on a business. Both parties appealed. The questions before the CoA were firstly, whether the "stapling" meant GEFI Limited was a resident of the US for the purposes of the Treaty; and secondly, If GEFI Limited was not resident in the US, whether it carried on business in the US through a permanent establishment for the purposes of the Treaty.

Whether stapling meant GEFI Limited was resident in the US for the purposes of the Treaty

Article 4 deals with residence and provides “any person ... is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature ....”[3]  The CoA considered whether the stapled shares would fall under ‘or similar nature’ under Article 4 of the Treaty.  Lady Justice Falk determined that each factor listed under Article 4 has a significance, and conveys a substantive factual or legal connection between the person concerned and the State in question. Accordingly, the CoA felt if “all that was intended to be covered was anything that resulted in worldwide taxation under domestic law there would be no need for a specific list.” [4] It was determined by the CoA that for a factor to fall under "a similar nature" under Article 4 there would also need to be a connection that has a similar character or quality, and a stapled entity does not amount to a criterion of a ‘"similar nature". The first sentence of Article 4(1) requires “both the existence of a local connection falling within the enumerated criteria ... and that connection attracts worldwide taxation”.[5]

Lady Justice Falk noted that the taxpayer in the UT relied on the Model Tax Convention (“MTC”) and OECD Commentary (“Commentary”) as its starting point, rather than the words of the Treaty itself, and this may have “increased the risk of error”.[6] The CoA agreed with HMRC’s interpretation on residence, based on the ordinary meaning of the words used in their context and in light of the object and purpose of the Treaty.

The CoA did not consider that the Commentary supported GEFI Limited’s case. Rather, the CoA held that the MTC does not suggest that “any rule that imposes worldwide taxation amounts to residence”. The MTC indicates the opposite by saying that it is up to States to determine "the conditions under which" a person is to be regarded as tax resident and ‘"consequently" fully liable to tax.[7] The CoA also suggested that if Article 4(1) of the Treaty is considered from the perspective of the 2000 version of the MTC, then its use of place of effective management as the tie-breaker reinforces HMRC’s interpretation. Residency falls in the State with the closest real connection.

The taxpayer further relied on various case law and academic commentary to support their interpretation of Article 4. The leading commentary on tax treaties, Klaus Vogel on Double Tax Conventions (“Vogel”) provides two possibilities to the interpretation of "or similar nature". Firstly, the broader "functional interpretation" which suggests that any domestic feature that triggers unlimited tax liability is sufficient. [8] In accordance with the functional interpretation, and in favour of the taxpayer, worldwide taxation would be all that was required to fall within Article 4 of the Treaty. By contrast, the second approach, the "territorial approach", follows a narrower interpretation which requires both unlimited liability to tax and a territorial connection between the taxpayer and the State. The CoA sided with the "territorial interpretation" of the Treaty in Vogel, and concluded that along with worldwide taxation a territorial connection between the taxpayer and the State would also be required.   

Did GEFI Limited carry on business in the United States through a permanent establishment for the purposes of the Treaty?

The CoA agreed with the UT that the FTT made no material error of law in deciding that GEFI Limited was not carrying on a business. The LP acted merely as a passive holding vehicle for some loan receivables. The board of GEFI US, as the LP’s general partner, did not make strategic decisions and in fact had “very little involvement”.[9]  The CoA agreed that the FTT was fully entitled to focus on the lack of activity by the general partner in reaching its evaluative conclusion.

Summary

The CoA’s decision provides useful guidance on the interpretation of residency under the Treaty. In particular, the decision sheds light on how the words "of a similar nature" should be interpreted in Article 4 of the Treaty. When determining residency, the ordinary meaning of the words used in their context and in the light of the object and purpose of the Treaty should be the starting point. The CoA concluded that  the “stapling” of the relevant shares did not represent a close “local connection” with the US. In accordance with the "territorial interpretation", what is required in order to fall within the criterion of a "similar nature" is both liability to worldwide taxation and the existence of a local substantive factual or legal connection to the State.

[1] GE Financial Investments v HMRC [2024] EWCA Civ 797.

[2] Pin-pointing Residence - Brass Tax (cadwalader.com).

[3] Article 4 of the Treaty.

[4] GE Financial Investments, para 68.

[5] GE Financial Investments, para 124.

[6] GE Financial Investments, para 125.

[7] GE Financial Investments, para 92.

[8] GE Financial Investments, para 107.

[9] GE Financial Investments, para 144.