General Electric (GE) have won their case at the Upper Tribunal (Upper Tribunal) concerning the meaning residence under the USA/UK tax treaty.  GE had set up a US limited partnership to hold substantial intra-group loans where a UK company was the main limited partner.  The shares in the UK company were ‘stapled’ to another US subsidiary of GE meaning that for US federal income tax purposes it was considered fully taxable in the US.  A share staple is where the shares of the UK subsidiary couldn’t be sold unless they were all transferred at the same time as all the shares in the US subsidiary.  HMRC had disallowed a double taxation credit holding that the UK subsidiary was not resident in the US for the purposes of the treaty.  The First-tier Tribunal (FTT) agreed with HMRC meaning that GE weren’t entitled to £125m of tax credits they expected.

Dissimilar to many tax treaties between states, the USA/UK tax treaty doesn’t have a residence tie-breaker clause.  This helps decide cases where residence could be in either state.  The UK company was automatically resident in the UK by reference its incorporation here but if also considered resident in the US then treaty benefits would apply and HMRC would be forced to pay the tax credits to the UK subsidiary.  The UT therefore had to determine whether the UK subsidiary was subject to full taxation (taxes charged on all its worldwide income) in the US that if found that it was due to the share staple.

The FTT while also finding similar facts then held that the company wasn’t US resident as it didn’t have any other ties to the US other than this legal tax link.  The UT disagreed with the FTT and reviewed case law and OECD tax treaty commentary.  They found that as the definition of residence referred back to domestic legal definitions that if the UK company was subject to full taxation in the US then it should be considered resident there for the purpose of the treaty.  There was no need for a further link to the US as US domestic legislation only treats companies as taxable in the US if they are registered there or elect to be taxed in the US by way of share stapling or other legal means.

This was enough for the appeal to be allowed enabling GE to have the tax credits repaid but the UT also considered whether the UK company was in ‘business’ for the purposes of the treat.  The UT agreed wit the FTT that the UK company wasn’t in business.  The term business isn’t defined within the treaty and the treaty refers back to domestic legislation of the contracting states.  The UT reviewed the domestic UK case law of was is meant as business and found that due to the minimal activities of the UK company that is wasn’t in business and it could see no reason to interfere with the FTT’s decision on the question.

The decision can be found at: GE FINANCIAL INVESTMENTS v THE COMMISSIONERS FOR HER MAJESTY’S REVENUE AND CUSTOMS [2023] UKUT 00146 (TCC) – GOV.UK (www.gov.uk)

While this is a complex decision it is positive news that meeting the requirements to be resident in a country with which the UK has concluded a tax treaty with can be met where domestic requirements are met.

Please contact us if you have any questions about the residency of companies, we are experienced with these matters issues and can help ensure companies remain taxable in the jurisdictions they are meant to be taxable within.