G E Financial Investments – English Court of Appeal finds that a deemed US resident was not a US treaty resident

A US company (“GEFI Inc.”) and UK company (“GEFI”) in the GE group formed a Delaware LP (“LP”) with GEFI Inc. as the 1% general partner and GEFI as the 99% limited partner. LP acquired five intercompany loans.

The stock of GEFI Inc. and GEFI were stapled, which caused GEFI to be deemed to be resident in the US under the Code, with a view to increasing the US foreign tax credit capacity in the US. GEFI claimed credit for the US income taxes payable by it against its UK income tax liabilities.

HMRC denied the credit. The first issue was whether GEFI was a US resident for purposes of Art. 4 of the UK-US treaty, which relevantly referred to “any person who, under the laws of that State, is liable to tax therein by reason of his domicile, residence, citizenship, place of management, place of incorporation, or any other criterion of a similar nature.” In concluding that GEFI was not so resident, Falk LJ stated:

The US connections required by s.269B are limited to a) stapling of more than 50% by value of the foreign corporation's shares to those of a domestic corporation, and b) direct or indirect ownership as to 50% or more by US persons. … Neither [branch] requires any form of link between the company itself and the United States, whether a formal legal one (such as incorporation, the location of its registered office or similar) or a factual one (such as place of management). … In contrast, the criteria specified in Article 4(1) all describe legal or factual connections between the entity itself and the relevant Contracting State of a kind that may justify worldwide taxation.

This then left the issue as to whether the US taxes imposed on GEFI were imposable in accordance with the Treaty on the basis of GEFI, through its participation in LP, having a permanent establishment in the US - so that the UK was required to accord a foreign tax credit to GEFI in accordance with Art. 24 of the Treaty (similar to Art. 24 of the Canada-UK Treaty). In confirming the finding of the FTT that the LP did not have a permanent establishment in the US on the basis that it was not carrying on business there under the UK concept of a business (having regard to Art. 3(2)), Falk LJ stated:

In essence, the LP acted merely as a passive holding vehicle for some loan receivables.

Neal Armstrong. Summaries of Commissioners for His Majesty's Revenue and Customs v GE Financial Investments [2024] EWCA Civ 797 under Treaties – Income Tax Conventions – Art. 4, Art. 5.