The current UK/USA Double Taxation Convention ('the 2002 DTC') came into force on 31 March 2003, when the condition set out at Article 29(2) thereof was satisfied with the exchange of instruments of ratification between the United Kingdom and the United States of America. The treaty had already been incorporated into UK law as Statutory Instrument No. 2848 of 2002.
The provisions of the new treaty took effect, so far as the work of HM Revenue & Customs (HMRC) is concerned, for UK taxes withheld at source from and after the 1 May 2003 by virtue of Article 29(2)(b)(i) (as amended by the Protocol to the treaty). The Protocol amendment also ensures that any entitlement of a US resident to tax credits ceased with respect to dividends paid by UK companies on or after 1 May 2003.
The purpose of this Double Taxation Guidance Note is to clarify the way in which US partnerships and Limited Liability Companies (LLCs) should claim relief under the new treaty from HMRC, and should be read in conjunction with the April 2003 special edition of the Tax Bulletin devoted solely to the new Double Taxation Convention (DTC). This is available to download from Tax Bulletins (Opens new window).
HMRC has two specific forms for US residents to use in claiming relief under the 2002 DTC for UK-source payments made on or after 1 May 2003.
These are:
US/Individual 2002 (PDF 120K) - for use by individuals
US/Company 2002 (PDF 280K) - for use by all other claimants.
The two forms are available as downloads from the HMRC website Guidance Notes are provided for completion of each form. Although these touch upon the position of partnerships and LLCs, HMRC considers that the issues raised by the transparent nature of these concerns to be such as to merit a separate and detailed discussion of what is required of them to claim relief.
Forms to be used for claims under the 1980 DTC, or for claims made for elections made under Article 29(3) of the 2002 DTC that the terms of the 1980 DTC apply for a transitional year, continue to be available from HMRC.
Article 1(8) of the DTC provides that
'An item of income, profit or gain derived through a person that is fiscally transparent under the laws of either Contracting State shall be considered to be derived by a resident of a Contracting State to the extent that the item is treated for the purposes of the taxation law of such Contracting State as the income, profit or gain of a resident.'
A transparent concern itself is therefore not given the right to found a claim for relief.
Instead, that right is given individually to those 'qualifying persons' defined by the General Definitions Article 3; and as further qualified by the Limitation on Benefits Article 27, who have derived their beneficial entitlement to income, profit or gain through their participation in the transparent concern. (It will be noted that this is not so very different from the situation that obtained under Article 4(1)(b)(i) of the 'old' 1980 DTC.)
Strictly speaking, HMRC should accept claims only from those partners and members who themselves fall to be regarded as 'qualifying persons' in their own right.
In practice, this would mean as many separate claims for one item of UK-source income paid to a transparent concern such as a partnership or LLC as there are beneficial owners to whom it is then being paid on or distributed.
HMRC recognises that applying the DTC provisions in such a literal way would be unwelcome to its customers and could possibly hamper the business interests of both countries. It would be a retrograde step in customer service terms, and would not be justified on either an assessment of risk to the UK Exchequer or on compliance grounds. HMRC wants to keep a proper balance between the ease with which US residents should be able to claim relief with the administrative procedures and paperwork that must be employed by the UK Revenue to verify and give effect to such a claim.
Accordingly, HMRC intends to continue its previous practice of taking claims in the names of both partnerships and LLCs.
These concerns should use the form US/Company 2002 (PDF 280K), and should provide (as before) a list of the names and addresses of the partners or members, with details of their respective shares of income. This is covered by the second bullet of the form's own Guidance Note 2.
This form is tailored for use by the majority of those non-individual businesses and concerns which are covered by detailed provisions of the DTC - most notably by the Limitations on Benefit Article 23, which lays down very specific tests for defining the 'qualified persons' who can benefit under the treaty. There is therefore no separate section for transparent concerns such as partnerships or LLCs.
HMRC ask partnerships and LLCs to complete the US/Company 2002 as follows
Claimants are also free to attach any statement or schedule in support of the claim, as they believe would help explain their circumstances or the basis of the claim.
HMRC will consider the replies to all the above, and the information supplied.
Consistent with previous practice, where the facts allow the reasonable conclusion that all beneficial owners of the income for whose shares relief is being claimed are 'qualifying persons' within the meaning of the DTC, then HMRC will process things in the normal way. This will more often than not involve a reference to the tax office for the UK payer, under normal internal liaison arrangements.
If the information given in with the claim form does not allow this conclusion, considering in particular the tests set out in Article 23, HMRC will probably have to contact claimants with further specific questions and requests for information before it can consider finalising processing of things.
HMRC do not want to add to the time taken to resolve matters. Where possible, it will start processing the claim, on a 'without prejudice' basis and pending satisfactory conclusion of any correspondence.
HMRC will be as quick as possible, with due consideration for customers' business needs, and with sympathy and understanding for any compliance difficulties that the process might cause them.
As with any claim, letting HMRC have an advance copy of the form US/Company 2002 (PDF 280K) (at the time it is submitted to the IRS for certification) may allow it to flag up any points of difficulty at an early stage, and opens up the possibility of anticipating what is needed or might be done before the certified form arrives.
There are two main ways in which HMRC gives DT treaty relief.
The first is by meeting a claim for repayment of all or some of the withholding tax deducted by a UK payer from a payment or payments already made. This is the 'default' by which the UK is obligated to honour its commitments under a DT treaty.
A resident of the United States has the potential only to establish a claim under the DTC. It is at the point when a payment is made which suffers withholding tax that the entitlement of that resident to relief materialises, subject to satisfactory proof that all the conditions for relief are then present, and the extent of the relief agreed upon.
In addition, UK law (through Statutory Instrument No.428 of 1970) gives HMRC the discretion to direct the UK payer when making future payments. Either not to deduct withholding tax at all, or to deduct it at a lower rate, that can be calculated by reference to the terms of a double taxation arrangement, rather than at the rate prescribed by UK tax law. This is called 'relief at source'.
In deciding whether or not HMRC should exercise its discretion in meeting an application for relief at source, it must primarily have regard to the risk that the underlying conditions for relief might change over the lifetime of a Direction (which will normally last no longer than five years). Such changes might remove the basis for relief altogether, or in some other way prejudice the amount of tax that the UK is otherwise properly entitled to receive in that period.
Given its duty of care to the UK Exchequer and taxpayer, HMRC have to give particular consideration to the desirability of giving DT treaty relief where transparent concerns such as partnerships and LLCs are concerned. This is because, more often than not, there is a much higher risk that the beneficial owners of such concerns will change. Or that there will be fluctuations in income or profit apportionment that might erode the amount of UK-source income that is attributable to the DT treaty-resident beneficial owners who were identified at the time the application for relief at source was made.
Attention is drawn to the undertaking sought from claimants in the Declaration (Part F of the US/Company 2002) that they will notify HMRC of any changes in the information given on the form. (A similar warning to notify any material changes is given to a UK payer when a Direction is issued to it.)
Without calling into question the good faith of partnership or LLC claimants who give these undertakings, HMRC considers that the problem of monitoring this aspect is particularly acute where there are a very large number of investors, or there is an unfeasible number of layers of participation - partners who are themselves partnerships, which contain yet more transparent partners.
For these reasons, although HMRC is willing to entertain any application for relief at source from partnerships or LLCs, it should be understood that it is likely to give relief in this way chiefly where:
Each case will be considered on its merits.
Otherwise, HMRC will consider giving relief only by meeting discrete repayment claims.
HMRC non-residents helpline: Tel 0845 300 0627 if calling from the UK, or +44 135 0627 if calling from outside the UK.
Send an email.
