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GE Financial Investments Ltd v HMRC concerned the interpretation of the UK/USA double tax convention and its application to GE Financial Investments Ltd (“GEFI Ltd”) for the accounting periods ending 31 December 2003 to 31 December 2008. GEFI Ltd claimed credit for US federal income tax paid on interest income against UK corporation tax paid on the same income. HMRC denied the claims resulting in GEFI Ltd paying around £189 million in tax and interest. GEFI Ltd appealed the denial of double taxation relief to the First-tier Tribunal (“FTT”), which dismissed the appeal. GEFI Ltd then appealed to the Upper Tribunal.
The key issues were:
1. Whether GEFI Ltd was resident in the USA for the UK/USA double tax convention.
2. If not, whether GEFI Ltd was carrying on business in the USA through a permanent establishment and thus entitled to double taxation relief under a different provision.
The Upper Tribunal allowed GEFI Ltd’s appeal because it was resident in the USA for treaty purposes. However, it also considered issue 2 and upheld the FTT’s decision that GEFI Ltd was not carrying on business in the USA.
Background Facts
GEFI Ltd was a UK resident subsidiary of GE Capital Investments (“GECI”), itself a subsidiary of the US parent General Electric Capital Corporation (“GECC”).
In 2003, GEFI Ltd’s articles were amended so its shares were “stapled” to the shares of a US affiliate, GE Financial Investments Inc (“GEFI Inc”). Due to this stapling, GEFI Ltd was treated as a domestic corporation for US federal income tax purposes and taxed on its worldwide income.
GEFI Ltd and GEFI Inc formed a Delaware limited partnership in 2003. GEFI Ltd held a 99% limited partnership interest. The limited partnership received loan promissory notes from another group company as capital contributions from the partners. It then lent the funds to other group affiliates.
GEFI Ltd was taxed in the UK on the interest income received via the partnership structure. It also paid US federal income tax on the same interest income due to the share stapling rules. GEFI Ltd claimed double taxation relief in the UK for the US tax suffered.
Was GEFI Ltd a US resident for treaty purposes?
The FTT held that despite being liable to US federal income tax, GEFI Ltd was not resident in the USA for treaty purposes. The share stapling only created a connection between shareholders and did not result in legal rights or obligations for GEFI Ltd in the USA.
The Upper Tribunal disagreed. It held that Article 4(1) of the UK/USA treaty adopted a broad test for residence – whether a person is liable to tax in a Contracting State under domestic law “by reason of” criteria such as domicile, residence, place of incorporation etc.
The Upper Tribunal noted that the OECD Model Convention and commentary supported interpreting Article 4(1) as referring to “full” tax liability on worldwide income, not just source taxation. The USA imposed a worldwide tax on GEFI Ltd by treating it as a domestic corporation due to the share stapling rules. Even though stapling was not the same as actual US incorporation, it had the same tax effect.
Further, other Contracting States to the OECD Model Convention often determine corporate residence based on formal legal criteria like the place of incorporation, not just factual criteria like place of management. The context, including the relevant US and UK tax laws, showed that the place of incorporation was the key factor in GEFI Ltd’s US tax residence.
The Upper Tribunal held that the share stapling rules were similar to other anti-avoidance rules deeming foreign companies to be residents. The formal method used to impose full tax liability was irrelevant – the effect was the same. Consequently, GEFI Ltd was resident in the USA under Article 4(1).
Was GEFI Ltd carrying on business in the USA?
The FTT examined the degree of activity undertaken by GEFI Ltd as a whole and decided it was not carrying on business in the USA. The Upper Tribunal found no error in the FTT’s decision. The FTT had properly considered the applicable legal principles from the case law on identifying a “business”.
The Upper Tribunal noted that receiving income and undertaking isolated acts mentioned in a company’s objects do not inevitably constitute a business. The FTT was entitled to conclude there was insufficient activity, particularly the limited involvement of GEFI Ltd’s directors in the partnership’s affairs, to amount to carrying on business in the US.
Analysis
The Upper Tribunal’s decision represents the correct approach to interpreting the residence article of double tax conventions. It accords with international norms.
- The domestic law meaning of residence should prevail. Article 4(1) of the OECD Model Convention and the UK/USA treaty make liability to tax under domestic law the key test. When negotiating treaties, the Upper Tribunal rightly held that the UK and USA must accept each other’s definitions of residence for their tax laws.
- Formal legal criteria like incorporation can establish corporate residence, not just factual criteria like place of management. As the Upper Tribunal observed, this is internationally accepted and adopted by many countries, including the UK.
- The effect of a domestic law rule in imposing full taxation matters, not just its form. Categorising GEFI Ltd as a deemed US corporation had the same effect as actual US incorporation. The US legislature chose this technique as an anti-avoidance measure to protect its taxing rights. The treaty could not have been intended to deny relief in that circumstance.
The Upper Tribunal’s purposive interpretation better achieves the object and purpose of eliminating double taxation. It prevents mismatches arising from variations in domestic law residence rules between the Contracting States. The FTT’s formalistic approach would have created an anomaly denying treaty benefits to a company fully taxed in the US as a resident.
The decision helpfully clarifies the scope of the residence article in double tax conventions. However, the FTT’s finding that GEFI Ltd did not carry on business was fact-specific. Greater involvement in the partnership’s activities may have sufficed to constitute a US business. Mere receipt of investment income does not automatically equate to carrying on business. Multinational groups should review their structures and activities to assess treaty eligibility. The case turned on GEFI Ltd’s particular position. But it indicates the likely outcome where a company is fully taxed as a treaty resident under another jurisdiction’s domestic law anti-avoidance rules. The residence state’s taxing rights should prevail in those circumstances. This accords with international treaty practice and prevents double non-taxation.
For tax resolution or compliance, please contact Tax Accountant at 0800 135 7323 or email info@taxaccountant.co.uk for expert advice.