Milestone Briefing Note – UK Partnerships
Over the past year we’ve worked on a number cross border transactions (inbound / outbound investment, reorganisations etc) in conjunction with tax advisers from various parts of the world. A common feature has been the interest in using a UK partnership (in one guise or another).
This briefing note highlights the main features and tax treatment of all UK partnerships.
1.1 There are three forms of partnership in the United Kingdom:
(a) ordinary partnerships;
(b) limited partnerships; and
(c) limited liability partnerships.
1.2 Ordinary partnerships (OP) and limited partnerships (LP) are regulated, respectively, by the Partnership Act 1890 (PA 1890) and the Limited Partnership Act 1907 (LPA 1907). Both of these Acts apply to the whole of the United Kingdom, although some special provisions apply only in Scotland. Most notably, in England and Wales and Northern Ireland, neither an OP nor a LP is a legal person, whereas in Scotland both are considered legal persons, distinct from their members.
1.3 Limited liability partnerships (LLP) are governed by the Limited Liability Partnerships Act 2000 (LLPA 2000) in the whole of the United Kingdom. A LLP has legal personality separate from that of its members.
2. Tax Transparency
2.1 OPs and LPs are treated as transparent for UK income and corporation tax purposes. This means that tax is paid at the level of the individual or corporate partners and not the partnership.
2.2 LLPs are also considered fiscally transparent for income and corporation tax purposes. This is in spite of LLPs being a body corporate with legal personality separate from that of its members. Fiscal transparency is given by treating the activities of the LLP, for tax purposes, as being carried on by its members, not the LLP itself.
3. Access to Treaty Benefits
3.1 Article 1 of the OECD Model Convention (on which most of the UK’s treaties are based) is entitled ‘Personal Scope’. It states as follows:
“This Convention shall apply to persons who are residents of one or both of the Contracting States.”
3.2 Thus to qualify for treaty benefits a partnership must be a:
(a) “person”; and
(b) be “resident” of one or both contracting states.
Neither OPs, LPs nor LLPs will qualify for treaty benefits since they they will either not be a “person” (entities endowed with legal personality) or they will not be “resident” of a contracting state from a UK tax perspective (liable to tax).
4. Using a UK Partnership as a Trading Vehicle
4.1 Because partnerships (OPs, LPs and LLPs) are fiscally transparent when carrying on a trade, a partnership with solely foreign partners/members is unlikely to incur any UK tax liability providing:
(a) no trade is undertaken in the UK;
(b) there is no UK permanent establishment; and
(c) there is no UK source income.
4.2 We have used UK LLPs to access domestic participation exemption regimes (which provides a full or partial exemption of domestic tax on receipt of dividends and capital gains). This flexibility can provide a significant tax enhancement.
4.3 UK resident but not domiciled individuals can continue to claim the UK’s remittance basis of taxation despite being a member of a UK partnership.
4.4 There can be advantages to using UK partnerships as regards the UK capital gains tax consequences. This is because the normal UK capital gains tax rules are generally subject to HMRC Statement of Practice D12. In certain circumstances, this can mean that partnership reorganisations (particularly as regards the allocation of partnership profits) can be effected in a tax efficient manner between the domestic and foreign partners.
4.5 Scottish LPs have been used extensively in the funds industry to hold carried interest and to undertake co-investment in fund structures. Recent (mid-2015) changes to these rules have significantly curtailed the attraction of these vehicles for use in this way.
4.6 Note that there is a risk with UK LLPs constituting a UK PE of any foreign company in which the LLP participates. Unlike a purely corporate scenario, this can inadvertently expose the non resident company’s profits to UK taxation. A trap to be wary of!
4.7 From an entity recognition perspective (pass-through v opaque), UK LLPs were, in the past used to arbitrage domestic and international rules. Most of this was stopped by the UK’s Anti-Arbitrage legislation introduced in 2005, but some flexibility remains.
5. VAT Registration
5.1 A UK partnership with no UK trade, no UK place of business and no UK members will likely be unable to obtain VAT registration in the UK. HMRC has published guidance denying entitlement to be registered for VAT purposes in cases where there is no UK fixed establishment.
6.1 The impact of BEPS Action 2 (hybrids and mis-matches) should also be noted. Given the UK is a signatory to BEPS, the proposed changes might have a significant impact on ‘playing’ the rules as regards partnership flexibility.
If you have any questions or comments with regard to this Milestone Tax Briefing, please do not hesitate to contact us.