G E Financial Investments

JurisdictionUK Non-devolved
Judgment Date08 June 2021
Neutral Citation[2021] UKFTT 210 (TC)
CourtFirst Tier Tribunal (Tax Chamber)

[2021] UKFTT 210 (TC)

Judge Brooks

G E Financial Investments

Philip Baker QC and John Brinsmead-Stockham, instructed by Slaughter and May, appeared for the appellant

Hui Ling McCarthy QC and Barbara Belgrano, instructed by the General Counsel and Solicitor to HM Revenue and Customs, appeared for the respondents

Corporation tax – Double taxation relief – Credit for US tax paid on interest receipts denied – Whether appellant was tax resident in the US – If not, whether appellant carrying on business through US permanent establishment – Found that appellant not tax resident in the US – Found that no permanent establishment created – Accordingly credit relief not available under art. 24 of the UK/US double tax treaty – Appeal dismissed – TIOPA 2010, s. 18(1).

The First-tier Tribunal dismissed an appeal by the taxpayer company against closure notices made by HMRC covering the taxpayer's returns for the years 31 December 2003 to 31 December 2008. The closure notices had denied in entirety relief for credit for US tax against the UK tax liability of the appellant in each year. HMRC did not consider that credit under the UK/US double tax treaty was available to the appellant. The taxpayer appealed on the basis that it was tax resident in the US as defined in art. 4 of the treaty (in which case it would have been resident in both states and the treaty would then have been applied as necessary), or failing that, the appellant had a permanent establishment in the US for the purposes of art. 7 of the treaty, and credit relief should be available under art. 24.

The FTT found that the appellant, whilst taxable in the US under US domestic law, was not tax resident in the US for the purposes of art. 4; nor did the appellant have a permanent establishment as defined under art. 7. The appeal would therefore be dismissed, and the taxpayer would not be allowed credit relief for the US tax paid.

Summary
Background

G E Financial Investments (GEFI) was a UK tax resident member company of the US headquartered General Electric (GE) group. During the period in question GEFI had been a limited company and a limited partner in a Delaware Limited Partnership, GE Financial Investments (USA) LP. In December 2009 GEFI re-registered as an unlimited company, and the limited partnership was dissolved.

The limited partnership held substantial loan assets, the counterparties being other members of the GE group. During the periods under appeal, the limited partnership generated significant amounts of interest income. GEFI was entitled to a 99% share of partnership profits.

The general partner of the limited partnership was GE Financial Investments Inc, a Delaware incorporated member of the GE group. The constitutional documents of both GEFI and GE Financial Investments Inc provided that no change in ownership of one could proceed without the new owner also acquiring all the equity in the other company; the shares of GEFI were “stapled” to that of GE Financial Investments Inc.

GEFI was a “foreign” company for US tax purposes. However, under US Federal tax legislation, where a foreign company's shares are “stapled” to those of a US corporation, the foreign company is taxed as if it was a US domestic corporation – i.e., on its worldwide profits. GEFI was thus subject to US tax on its worldwide profits, which were its 99% share of the profits from the limited partnership.

In each period under appeal the US tax paid had exceeded the amount of UK tax payable on GEFI's profits, and GEFI had claimed credit relief under the UK/US double tax treaty for the US tax, eliminating the UK tax due. As noted, the profits of GEFI were substantial, and over the period under appeal, the amount of UK tax for which credit relief was claimed was almost £125m.

Documents reviewed in the appeal suggested the structure assisted with the GE group's UK “thin capitalisation” position. However, the motive for the structure was not in point in the appeal, and the benefit of the structure to GE was not explored further.

The issues

HMRC denied credit relief to GEFI on the basis that it was not entitled to benefits under the UK/US double tax treaty. It was agreed between the parties that entitlement to benefits turned on two issues:

  • Was GEFI tax resident in the US for the purposes of the treaty during the period in question?
  • If not, did GEFI have a permanent establishment in the US during the period, on which US tax was payable under the treaty, for which credit against UK tax should be given?
The residence question

There was no dispute that GEFI was subject to US taxation under US domestic law because of the “stapling” arrangement. However, the requirement for being considered tax resident in a state under art. 4 of the treaty between the UK and the US is that a taxpayer is subject to tax in the state by reason of “domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature”.

Although GEFI was subject to US taxation, it was fundamentally a foreign corporation subject to US tax rather than a US resident corporation. GEFI's place of incorporation and management was the UK. Citizenship and domicile apply to individuals, not corporations. Accordingly, the issue in question was whether there was a “criterion of a similar nature” created by the “stapling” arrangement, which could then bring GEFI within the art. 4 definition.

An expert witness for HMRC agreed with the expert for the appellant that the “stapling” arrangement was analogous to incorporation in the US for US federal tax purposes.

The FTT considered in detail how art. 4 of the treaty should be interpreted. The FTT noted that the Supreme Court in Fowler v R & C Commrs [2020] BTC 15 had concluded that OECD commentaries have “persuasive force” when interpreting treaties based on the OECD model, as is the UK/US treaty, and examined the commentary in detail.

The OECD commentary on art. 4 indicates that the model art. 4 criteria aim to define tax residence in terms of being subject to comprehensive tax liability in a state due to an attachment to that state. Article 4 of the model convention does not include “place of incorporation” as a criterion for determining tax residence. Academics who have studied the model treaty and its commentary suggest that, where a treaty does not explicitly include “place of incorporation” in art. 4, the place of incorporation of a company is not sufficient to be considered a “criterion of similar nature” to result in a company being tax resident in a state.

The FTT concluded that a “criterion of a similar nature” had to be interpreted to mean arrangements including an attachment to a state and could not be interpreted to mean an arrangement that was only analogous to incorporation in a state, even if incorporation is included in a treaty as a criterion for residence.

Accordingly, the appellant could not be considered tax resident in the US under art. 4 of the treaty. This prevented art. 4 (5) operating to give GEFI credit for US tax paid against UK profits.

The P-E Question

Having decided that GEFI was not tax resident in the US under art. 4, the FTT had to consider whether GEFI had a permanent establishment in the US under art. 7 of the treaty, i.e., whether it was carrying on a business through a fixed place of business in the US.

HMRC accepted that if GEFI was carrying on a business through the limited partnership, there was no dispute as to where the business was carried out (the US). Therefore the question was whether GEFI was carrying on a business.

The FTT reviewed several authorities regarding this point, including the case of Ramsay v R & C Commrs [2013] BTC 1868. That case had set down a number of criteria which could be used to determine whether a business was being carried on. The FTT focussed on the criteria that a business required activities to be pursued with reasonable or recognisable continuity and conducted on sound and recognised business principles. The FTT considered the activity of the limited partnership, whilst a “serious undertaking” was passive, sporadic and isolated in nature. Moreover, the officers of the limited partnership merely seemed to sign-off decisions made elsewhere, and that lack of involvement suggested the limited partnership was not conducting a business activity.

Accordingly, GEFI did not have a US permanent establishment under art. 7. As a result, it was not entitled under art. 24 to credit against UK taxation the US tax paid.

The FTT did consider whether relief under art. 24 would have been available had it found a permanent establishment did exist and concluded that relief would have been available in those circumstances.

Decision

The taxpayers appeal would be dismissed.

Comment

Comment In this case, the FTT chose to interpret the US/UK tax treaty in the context of the wider OECD model convention. Although the treaty itself inserted an additional criterion for tax residence for a company - place of incorporation – the FTT chose to interpret this insertion narrowly, and not adapt the interpretation of “criterion of a similar nature” to include “analogous to incorporation”. A “criterion of similar nature” requires a greater attachment to a territory than mere incorporation can bring. In referring to counsel for the appellants arguments against this as “persuasive”, Judge Brooks was perhaps indicating his judgement was finely balanced here.

Regarding the second question, the lack ofa material involvement in decision making by the US officers of the limited partnership was a significant factor in the FTT finding there was no permanent establishment of GEFI in the US. This underlines the need for operations to be set up with appropriate substance for the expected tax status to follow.

The judgement also illustrated some general points around treaty interpretation. In a memorandum of understanding to the US/Netherlands treaty, it is stated that a Dutch “stapled” corporation will be treated as...

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