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You are here: BAILII >> Databases >> United Kingdom Supreme Court >> Anson v Revenue and Customs [2015] UKSC 44 (1 July 2015) URL: https://www.bailii.org/uk/cases/UKSC/2015/44.html Cite as: [2015] 4 All ER 288, [2015] STI 2019, 17 ITL Rep 1007, [2015] BTC 21, [2015] UKSC 44, [2015] STC 1777 |
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Trinity Term
[2015] UKSC 44
On appeal from: [2013] EWCA Civ 63
Anson (Appellant) v Commissioners for Her Majesty's Revenue and Customs (Respondent)
before
Lord Neuberger, President
Lord Clarke
Lord Sumption
Lord Reed
Lord Carnwath
JUDGMENT GIVEN ON
Heard on 27 and 28 October 2014 and 30 April 2015
Appellant Jonathan Peacock QC Richard Keen QC John Brinsmead-Stockham (Instructed by Ernst & Young LLP) |
Respondent David Ewart QC Julian Ghosh QC James Henderson (Instructed by HMRC Solicitor's Office) |
LORD REED: (with whom Lord Neuberger, Lord Clarke, Lord Sumption and Lord Carnwath agree)
The facts
"Subject to the provisions of this article V, to the extent cash is available, distributions of all of the excess of income and gains over losses, deductions and expenses allocated in accordance with section 4.2 with respect to any calendar year will be made by the company at such time within seventy-five (75) days following the end of such calendar year and in such amounts as the managing members may determine in their sole discretion. The managing members may from time to time in their discretion make additional distributions in accordance with the provisions of this article V."
Mr Anson was not a "managing member" during the relevant period.
i) The LLC was a legal entity which was brought into existence by executing a certificate of formation, filing of that certificate with the Delaware Secretary of State, and entering into an LLC agreement.
ii) The business of the LLC was carried on by the LLC itself, rather than by its members, in the sense that the LLC as an entity with separate legal existence was engaged in business. The members were however active in the business, each member being required by the LLC agreement to devote at least 90% of his full business time to the advancement of the LLC's business and interests.
iii) The assets used for carrying on the business of the LLC belonged beneficially to the LLC and not to the members.
iv) The LLC was liable for the debts incurred as a result of carrying on its business. The members had no liability for the liabilities of the LLC.
i) A Delaware "limited liability company interest" is defined by section 18-101(8) of the LLC Act as "a member's share of the profits and losses of a limited liability company and a member's right to receive distributions of the limited liability company's assets".
ii) That interest is in principle assignable, except as provided in the LLC agreement. The assignee has no right to participate in the management of the business except as provided in the agreement and with the approval of all the other members. An assignee does not become a member but becomes entitled to the same economic interest as the assignor.
iii) In the present case, the LLC agreement provided that a member's interest could not be transferred except for sales by a former member (a) under provisions giving the LLC a right of first refusal before any such sale, (b) to a person engaged in the full time business of the LLC, with the written consent of the managing members and two-thirds of the other original members, or (c) on death.
iv) Section 18-503 of the LLC Act provides that "the profits and losses of a limited liability company shall be allocated among the members, and among classes or groups of members, in the manner provided in a limited liability company agreement".
v) "A limited liability company interest is personal property. A member has no interest in specific limited liability company property" (section 18-701 of the LLC Act).
vi) Subject to the LLC agreement, the members manage the LLC and vote in proportion to their interest in profits.
vii) The LLC agreement provided that the operation and policy of the LLC was vested in the managing members, who had power to contract on its behalf, but certain matters, such as mergers and incurring liabilities of more than $500,000 in a year, required the consent of the members.
viii) The interest of a member in the LLC was not similar to share capital, but was more similar to partnership capital in an English partnership.
"Are the persons who have an interest in the entity entitled to share in its profits as they arise; or does the amount of profits to which they are entitled depend on a decision of the entity or its members, after the period in which the profits have arisen, to make a distribution of its profits?"
"This means that the profits do not belong to the LLC in the first instance and then become the property of the members because there is no mechanism for any such change of ownership, analogous to the declaration of a dividend. It is true, as Mr Talley has said, that the assets representing those profits do belong to the LLC until the distribution is actually made but we do not consider that this means that the profits do not belong to the members; presumably the same is true for a Scots partnership. Conceptually, profits and assets are different, as is demonstrated by the reference to both in the definition of 'limited liability company interest' [in section 18-101(8) of the LLC Act]. There is a corresponding liability to the members evidenced by the allocation to their capital accounts. Accordingly, our finding of fact in the light of the terms of the LLC operating agreement and the views of the experts is that the members of [the LLC] have an interest in the profits of [the LLC] as they arise." (para 10)
"In summary, our conclusion in relation to the LLC operating agreement is that the combined effect of section 18-503 of the Act and the terms of article IV means that the profits must be allocated as they arise among the members. It follows that the profits belong as they arise to the members. Article V dealing with payment is irrelevant to this conclusion ."
Double taxation relief
"United States tax payable under the laws of the United States and in accordance with the present Convention, whether directly or by deduction, on profits or income from sources within the United States (excluding in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits or income by reference to which the United States tax is computed."
The proceedings before the FTT
The Upper Tribunal
The Court of Appeal
"Where the taxpayer became entitled to the profit 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. This will in general mean that, as the judge held, he has to show a proprietary right to the profits." (para 38)
"in order for a member of an entity to show that he was entitled to profits from the moment that the profit arose he will have to show that he has an interest in the assets to the value of the profit. This will necessarily be a proprietary interest." (para 59)
"Delaware law governs the rights of the members of [the LLC] as the law of the place of its incorporation, and the LLC agreement is expressly made subject to that law. However, the question whether those rights mean that the income of [the LLC] is the income of the members is a question of domestic law which falls to be determined for the purposes of domestic tax law applying the requirements of domestic tax law ." (para 71)
The present appeal
The Vienna Convention on the Law of Treaties
"Article 31
General rule of interpretation
1. A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2. The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) Any agreement relating to the treaty which was made between all the parties in connexion with the conclusion of the treaty;
(b) Any instrument which was made by one or more parties in connexion with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty.
3. There shall be taken into account, together with the context:
(a) Any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) Any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) Any relevant rules of international law applicable in the relations between the parties.
4. A special meaning shall be given to a term if it is established that the parties so intended.
Article 32
Supplementary means of interpretation
Recourse may be had to supplementary means of interpretation, including the preparatory work of the treaty and the circumstances of its conclusion, in order to confirm the meaning resulting from the application of article 31, or to determine the meaning when the interpretation according to article 31:
(a) Leaves the meaning ambiguous or obscure; or
(b) Leads to a result which is manifestly absurd or unreasonable."
The object and purpose of the Convention
Context
The background to the 1945 Convention
"My Lords, it is now clearly established that in the case of a limited company the company itself is chargeable to tax on its profits, and that it pays tax in discharge of its own liability and not as agent for its shareholders. The latter are not chargeable with income tax on dividends, and they are not assessed in respect of them. The reason presumably is that the amount which is available to be distributed as dividend has already been diminished by tax on the company, and that it is thought inequitable to charge it again."
Lord Wright gave a similar explanation at p 75:
"... the shareholder is not taxed under Schedule D in respect of that part of his income which consists of dividends. The profits have been charged to tax in the hands of the company and that fact is deemed to redound to his benefit."
"Their taxation would seem to be logical, but it would be destructive of joint stock company enterprise. ... The reason for their [scil, the shareholders'] discharge may be the avoidance of double taxation, or to speak accurately, the avoidance of increased taxation."
"The English company is taxed on the balance of its profits or gains, that is on its income; the shareholder is taxed on his own income. The shareholder is never taxed on the company's fund of profits, but only on the dividend which comes to him in payment of the debt which is created when the company declares the dividend. The tax is in every case on the individual's income, not on a fund possessed by another person, the company, even though it is the fund of profits of that company, from which the individual's income or part of it will be paid. ... This principle must not be obscured by reason of the circumstance that in the way already noted, the dividend is treated as franked by the tax paid by the company. The fund which is taxed in the hands of the company and the dividend which is declared by the company in favour of the shareholder are separate items for taxation law. It is only the latter which is the shareholder's income."
The 1945 Convention
"Subject to section 131 of the United States Internal Revenue Code as in effect on the first day of January, 1945, United Kingdom tax shall be allowed as a credit against United States tax. For this purpose, the recipient of a dividend paid by a corporation which is a resident of the United Kingdom shall be deemed to have paid the United Kingdom income tax appropriate to such dividend if such recipient elects to include in his gross income for the purposes of United States tax the amount of such United Kingdom income tax."
"Subject to such provisions (which shall not affect the general principle hereof) as may be enacted in the United Kingdom, United States tax payable in respect of income from sources within the United States shall be allowed as a credit against any United Kingdom tax payable in respect of that income. Where such income is an ordinary dividend paid by a United States corporation, such credit shall take into account (in addition to any United States income tax deducted from or imposed on such dividend) the United States income tax imposed on such corporation in respect of its profits, and where it is a dividend paid on participating preference shares and representing both a dividend at the fixed rate to which the shares are entitled and an additional participation in profits, such tax on profits shall likewise be taken into account in so far as the dividend exceeds such fixed rate."
The 1966 Protocol
"... Subject to the provisions of the law of the United States regarding the allowance as a credit against United States tax of tax payable in a territory outside the United States (which shall not affect the general principle hereof), the United States shall, however, allow to a citizen, resident or corporation, as a credit against its taxes, the appropriate amount of United Kingdom income tax paid and, in the case of a United States corporation owning at least 10% of the voting power of a corporation resident in the United Kingdom, shall allow credit for the appropriate amount of United Kingdom tax paid by the corporation paying such dividend with respect to the profits out of which such dividend is paid ."
"(2) Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (which shall not affect the general principle hereof),
(a) United States tax payable under the laws of the United States and in accordance with the present Convention, whether directly or by deduction, on profits, income or chargeable gains from sources within the United States (excluding, in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits, income or chargeable gains by reference to which the United States tax is computed;
(b) In the case of a dividend paid by a company which is a resident of the United States to a company which is resident in the United Kingdom and controls directly or indirectly at least 10% of the voting power in the United States company, the credit shall take into account (in addition to any United States tax creditable under (a)) the United States tax payable by the company in respect of the profits out of which such dividend is paid."
The 1975 Convention
"Notwithstanding any provision of this Convention except paragraph 4 of this article, a contracting state may tax its residents ... and its nationals as if this Convention had not come into effect."
Article 1(4) provides that nothing in article 1(3) affects the application of a number of specified provisions, including article 23. The net result is that income may be taxed on the basis of residence or nationality (except where otherwise specified in article 1(4)), as well as on the basis of one of the distributive articles, but double taxation is then to be avoided by applying article 23.
"In accordance with the provisions and subject to the limitations of the law of the United States (as it may be amended from time to time without changing the general principle hereof), the United States shall allow to a resident or national of the United States as a credit against the United States tax the appropriate amount of tax paid to the United Kingdom; and, in the case of a United States corporation owning at least 10% of the voting stock of a corporation which is a resident of the United Kingdom from which it receives dividends in any taxable year, the United States shall allow credit for the appropriate amount of tax paid to the United Kingdom by that corporation with respect to the profits out of which such dividends are paid."
With some minor differences of expression, this provision is in substance the same as article 13(1) of the 1945 Convention as amended by the 1966 Protocol.
"(2) Subject to the provisions of the law of the United Kingdom regarding the allowance as a credit against United Kingdom tax of tax payable in a territory outside the United Kingdom (as it may be amended from time to time without changing the general principle hereof):
(a) United States tax payable under the laws of the United States and in accordance with the present Convention, whether directly or by deduction, on profits or income from sources within the United States (excluding in the case of a dividend, tax payable in respect of the profits out of which the dividend is paid) shall be allowed as a credit against any United Kingdom tax computed by reference to the same profits or income by reference to which the United States tax is computed;
(b) in the case of a dividend paid by a United States corporation to a corporation which is resident in the United Kingdom and which controls directly or indirectly at least 10% of the voting power in the United States corporation, the credit shall take into account (in addition to any United States tax creditable under (a)) the United States tax payable by the corporation in respect of the profits out of which such dividend is paid."
These provisions repeat almost verbatim the terms of article 13(2) of the 1945 Convention, as revised by the 1966 Protocol. The only change is the deletion of the references to chargeable gains.
"For the purposes of the preceding paragraphs of this article, income or profits derived by a resident of a contracting state which may be taxed in the other contracting state in accordance with this Convention shall be deemed to arise from sources within that other contracting state, except that where the United States taxes on the basis of citizenship, the United Kingdom shall not be bound to give credit to a United States national who is resident in the United Kingdom on income from sources outside the United States as determined under the laws of the United Kingdom and the United States shall not be bound to give credit for United Kingdom tax on income received by such national from sources outside the United Kingdom, as determined under the laws of the United States."
This provision is of wider scope than article 13(3) of the 1945 Convention, but has the same function of enabling it to be determined whether income has its source within the UK or the US for the purpose of applying article 23(1) and (2).
The first ground of appeal
The second ground of appeal: "sources"
"As regards the application of this Convention by a contracting state any term not otherwise defined shall, unless the context otherwise requires and subject to the provisions of article 25 (Mutual agreement procedure), have the meaning which it has under the laws of that contracting state relating to the taxes which are the subject of this Convention."
Since the expressions "sources" was not defined by the Convention, it was submitted that it must be given the meaning which it had under UK tax law.
Memec
The correct approach to the present question
Relief under the Convention in the present case
"If a trader carries on a trade beneficially, the profits belong to him and any instrument which obligates the trader to pay on those profits creates a source for the payee which is a distinct source from that of the trading entity's trade. ... A trader who agrees contractually to pay all, or a part of, his profits to a third party remains taxable on all of his profits. The profits do not belong to the third party and he is not taxable on them."
"The profits do not belong to the LLC in the first instance and then become the property of the members. ... Accordingly, our finding of fact in the light of the terms of the LLC operating agreement and the views of the experts is that the members of [the LLC] have an interest in the profits of [the LLC] as they arise."
Conclusion