Commissioners for His Majesty's Revenue and Customs v GE Financial Investments

Factual and Procedural Background

This opinion concerns an appeal by HMRC against a decision of the Upper Tribunal ("UT") that the Respondent, a UK incorporated company ("Company A"), was a resident of the United States for purposes of the US/UK double tax convention (the "Convention"). The UT reversed the First-tier Tribunal's ("FTT") conclusion on this issue, affecting the entitlement to double tax relief relating to US tax paid on Company A's interest income for accounting periods ending 31 December 2003 to 31 December 2008.

Company A is part of a well-known multinational group, ultimately owned by a US corporation ("Company B"). Company A was incorporated in the UK in 1997 and was a subsidiary of another UK company, which also had a US incorporated subsidiary ("Company C"). Company A and Company C's shares were "stapled" together, causing Company A to be treated as a domestic US corporation for US tax purposes under section 269B of the US Internal Revenue Code, but Company A remained UK tax resident by incorporation.

Company A and Company C formed a Delaware limited partnership ("LP") with Company A holding a 99% limited partner interest and Company C the 1% general partner. The LP held several debts owed by other group companies, with the LP treated as tax transparent in both the UK and US, meaning its income was taxable directly in the partners' hands. The structure was originally intended to obtain US tax advantages, which did not materialize due to changes in US tax law, but was retained for potential UK tax advantages.

The FTT initially found that Company A was not US resident for Convention purposes and was not carrying on business in the US. The UT reversed the finding on residence but upheld the finding on carrying on business. This appeal concerns two issues: (1) whether Company A was US resident for Convention purposes due to share stapling, and (2) if not, whether Company A carried on business in the US through a permanent establishment.

Legal Issues Presented

1. Whether the share stapling between Company A and its US incorporated subsidiary had the effect of making Company A a resident of the United States for purposes of the US/UK double tax Convention during the relevant period.
2. If Company A was not US resident, whether it carried on business in the United States through a permanent establishment for purposes of the Convention during the relevant period.

Arguments of the Parties

HMRC's Arguments

• Residence under the Convention requires both liability to worldwide taxation and a substantive connection or attachment to the State, not merely liability to tax.
• The share stapling does not provide the requisite connection to establish US residence under the Convention.
• Company A was not carrying on business in the US as its activities were passive, sporadic, and lacked regularity and substance.
• Interpretation of the Convention must focus on the ordinary meaning of its terms, context, and object and purpose, not solely on domestic law deeming provisions.

Company A's Arguments

• Company A contended that the share stapling under US law (s.269B) effectively made it US resident for Convention purposes.
• Alternatively, Company A argued that the US tax treatment should be applied to interpret the residence concept in the Convention.
• Company A disputed the FTT's conclusion on carrying on business, asserting a strong presumption that a company putting assets to gainful use carries on business.
• Company A relied on academic commentaries and foreign case law to support its interpretation of residence and business carrying on.

Table of Precedents Cited

Court's Reasoning and Analysis

The court commenced its analysis by focusing on the language of Article 4(1) of the Convention, which defines a "resident of a Contracting State" as any person liable to tax "by reason of" domicile, residence, citizenship, place of management, place of incorporation, or any similar criterion. The court emphasized that the phrase "by reason of" requires a causal connection between the liability to tax and a substantive legal or factual connection with the State.

The court rejected the argument that Company A's US tax liability under section 269B, which treats stapled foreign corporations as domestic for US tax purposes, was sufficient to establish US residence for Convention purposes. This was because s.269B is a deeming provision based on ownership and control without requiring any territorial or substantive connection between Company A and the United States. The court held that such a provision does not constitute a "criterion of a similar nature" to those enumerated in Article 4(1).

In interpreting the Convention, the court applied established principles of treaty interpretation under the Vienna Convention, prioritizing the ordinary meaning of the text, its context, and the object and purpose of the Convention, which is to avoid double taxation while delineating taxing rights between residence and source States.

The court found that the UT erred by relying heavily on the OECD Model Tax Convention (MTC) and its Commentary, rather than the precise wording and context of the Convention itself. The court agreed with the FTT that Company A was not US resident for Convention purposes.

Regarding the second issue, the court upheld the FTT's finding that Company A was not carrying on business in the United States through a permanent establishment. The court noted that the LP's activities were passive and sporadic, lacking regularity, substance, and active management by Company A’s directors. The court applied UK tax law principles to define "carrying on business," relying on leading authorities such as American Leaf, and found no material error in the FTT’s evaluative conclusion.

The court also emphasized that the size of the loans held by the LP was not determinative; the qualitative nature and substance of activities were critical. The lack of strategic direction and active participation by Company A's general partner reinforced the conclusion that Company A was not carrying on business in the US.

Holding and Implications

The court ALLOWED HMRC's appeal on Issue 1, concluding that Company A was not a resident of the United States for purposes of the US/UK double tax Convention. The court DISMISSED Company A's appeal on Issue 2, upholding the finding that Company A was not carrying on business in the United States through a permanent establishment.

As a result, the decision of the Upper Tribunal on residence is set aside, reinstating the First-tier Tribunal's conclusion that the United Kingdom is not required to confer double tax relief in respect of US tax paid on Company A's interest income for the periods in dispute. The UT's decision on carrying on business is upheld.

No new legal precedent was established beyond the application of established principles of treaty interpretation and tax law to the particular facts of this case. The decision clarifies that domestic deeming provisions like section 269B of the US Internal Revenue Code do not, by themselves, establish residence for treaty purposes absent a substantive connection to the State.