Key Facts
- •HMRC appealed a decision of the Upper Tribunal (UT) that GE Financial Investments (GEFI), a UK company, was a US resident for tax purposes under the US/UK double tax convention.
- •The UT reversed the First-tier Tribunal (FTT) decision, leading to the UK needing to provide double tax relief for US tax on GEFI's interest income (approximately £124m in UK corporation tax plus £64m interest, and approximately US$303m in US tax).
- •GEFI's shares were 'stapled' to those of a US subsidiary (GEFI Inc.), leading to GEFI being treated as a US domestic corporation for US federal income tax purposes under section 269B of the US Internal Revenue Code.
- •GEFI and GEFI Inc formed a limited partnership (LP) where GEFI held a 99% interest, managing the LP's activities of holding and lending financial receivables.
- •The key issues were whether the share staple made GEFI a US resident (Issue 1) and whether GEFI carried on business in the US through the LP (Issue 2).
Legal Principles
Interpretation of double tax conventions requires good faith, consideration of ordinary meaning within context, object, and purpose (Vienna Convention, Article 31).
Vienna Convention on the Law of Treaties 1969, Article 31
The term "resident of a Contracting State" under Article 4(1) of the Convention means liability to tax by reason of domicile, residence, citizenship, place of management, place of incorporation, or any similar criterion; excluding liability for income from sources in that state only.
US/UK Double Tax Convention, Article 4(1)
For treaty purposes, "business" should have the meaning it has under the applicable UK tax law (Convention, Article 3(2)).
US/UK Double Tax Convention, Article 3(2)
A company putting its assets to gainful use is presumed to be carrying on business, but this presumption can be rebutted.
American Leaf Blending Co v Director-General of Inland Revenue [1979] AC 676 (PC)
Outcomes
HMRC's appeal on Issue 1 (residence) was allowed.
The court held that the share stapling under s.269B of the US Internal Revenue Code did not create a 'criterion of a similar nature' to the listed criteria in Article 4(1) of the Convention, requiring a genuine connection to the US. Worldwide taxation alone is insufficient.
GEFI's appeal on Issue 2 (carrying on business) was dismissed.
The FTT's finding that GEFI was not carrying on business in the US was upheld. The court found the FTT's assessment of the facts was reasonable; the LP's activities, primarily passive investment, did not constitute a business.