US Limited Liability Companies and Double Taxation

Introduction

The US is a very popular jurisdiction that attracts foreign investment. For those investors who are tax resident in the UK, choosing the right investment structure is key.

A favoured US structure used to invest in the US is a Limited Liability Company (“LLC”). This is often seen as an easy option to provide limited liability and is often suggested without consideration for the home country tax issues.  For taxpayers resident in the UK, for example, using a US LLC can produce unsavoury tax consequences.

In short, the treatment of US LLCs from a US and UK tax perspective are not aligned. Generally, from a UK tax perspective, US LLCs are considered opaque corporate entities, whilst from a US tax perspective, the default treatment of US LLCs is that they are transparent flow-through entities, akin to a sole trader or partnership. This lack of alignment between the two jurisdictions can lead to double taxation.

How Double Taxation Arises

In this article, we will be focusing on the issues that non-US Persons, resident in the UK face for tax purposes. Before we dive into a case study that provides context to the problem, in the first instance, let us explain how double taxation can arise.

From a US tax perspective, as the default treatment of US LLCs is that they are transparent flow-through entities, non-US Persons will be subject to US taxation on their pro-rated share of the US-sourced income from the US LLC.

From a UK tax perspective, generally, US LLCs will be considered opaque corporate entities. As such, non-US Persons who are also tax resident in the UK will be subject to UK taxation when they receive a distribution from the US LLCs; however, the type of distribution and whether it is one of income or capital is important.

The end result is that the US LLC member will be subject to (i) US taxation on their pro-rated share of US-source income from the US LLC and (ii) UK taxation on profits distributed to them from the US LLC.

Crucially, tax credits will unlikely be available between the two jurisdictions with respect to such activity; hence, double taxation.A Case Study

Jemima is a non-US Person who is tax resident in the UK. Jemima has an interest in a US LLC where 100% of the underlying activity is US-source income derived from real estate based in Texas. The US LLC is wholly owned by Jemima.

For this case study, we have assumed the profits from the LLC are $250,000.

• US LLC Profit $250,000
• US Tax at 37% on US LLC Profit $92,500
• Post Tax Distribution $157,500
• UK Tax at 39.35% on Dividends $61,976
• Total US and UK Tax $154,476
• Effective Tax Rate 61.8%

This is, of course, based on the highest rates of tax in both jurisdictions and represents a worst-case scenario. It also doesn’t consider State tax issues, which may increase the tax burden further. But it illustrates the issue.

US LLCs are not the only investment structure that results in such a scenario of double taxation; S-Corps, another popular investment vehicle in the US, will also result in a similar pattern of double taxation.

Anson v HMRC

Back in 2015 after a long legal battle, Mr Anson finally won his case against HMRC, and was allowed to claim a credit for the US tax against UK tax on his LLC profits.  However, the Anson case was driven by a very narrow set of facts and circumstances. The general position adopted by HMRC is that a US LLC is an opaque entity, as discussed above. HMRC doubled down on their position in December 2024 stating the following in their guidance “HMRC continue to believe that the profits of an LLC will generally belong to the LLC in the first instance and that members will generally not be treated as “receiving or entitled to the profits” of an LLC.”

To determine whether the Anson case can be relied on, a meticulous review of the articles of the US LLC will need to be undertaken. Legal counsel is generally always recommended.

Other Considerations

In addition to the risk of double taxation, where a US LLC is wholly owned by a non-US Person, since the 2017 US tax year, non-US Persons who own 100% of a US LLC may now be required to file Form 5472 with the US authorities. Form 5472 discloses details such as the beneficial owner of the US LLC and certain transactions between the US LLC and related people.
Penalties for not complying with Form 5472 filing obligations can be significant. A $25,000 penalty, increased from $10,000, will be assessed on a wholly foreign-owned US LLC that fails to timely file Form 5472 or files a substantially incomplete Form 5472.

To file Form 5472, the wholly foreign-owned US LLC must first obtain an Employer Identification Number (“EIN”). Once an EIN has been issued, the logistics will involve filing a pro forma Form 1120 (US Corporation Income Tax Return) with Form 5472 attached by the due date of the Form 1120.
As US LLCs may require annual funding to remain in existence, it is very likely that a wholly foreign-owned US LLC will have an annual Form 5472 requirement to disclose transactions between the owner of the US LLC and the US LLC.

We have assisted many clients in handling their Form 5472 obligations, including rectifying prior-year delinquency.

Summary

Non-US Persons tax resident in the UK who have interests in US LLCs can result in very punitive rates of tax, with double taxation frequently arising. In addition to the punitive rates of tax, where a US LLC is wholly foreign-owned, additional US reporting via Form 5472 will likely be required on an annual basis.

If you are resident in the UK and have an interest in a US LLC or are looking to invest in a US LLC, there could be some relief to mitigate the punitive double taxation between the US and the UK but it is commonly the case that restructuring will be recommended.

If you would like to gain a better insight on the tax treatment of US LLCs or if you have any questions about the information discussed above, please do reach out via our contacts page.