A United Kingdom Limited Liability Partnership (LLP) is a very popular vehicle for international commercial activity. This is because the UK LLP is a body corporate with a legal personality that provides its members with limited liability, and at the same time, it’s tax transparent.
The law states that a trade, profession or business conducted by a UK LLP shall be treated as though carried out in partnership by its members. The effect of this is to ensure that members of an/the LLP are taxed as though they are partners in a partnership.
Reduced Taxation Opportunities for International Business
The UK only taxes non-residents of the UK on their UK source income. Therefore, when a UK LLP is engaged in a trade, profession or business, with a view to making a profit, and has no UK members or UK trade, no permanent establishment or UK source income, the UK has no authority to tax the LLP or its members. (The members and the shareholders of the members may potentially have a tax liability in their home jurisdictions).
Opportunities are therefore optimised where UK LLPs are formed to carry out non UK business by companies in zero or low tax jurisdictions.
Can a UK LLP Benefit from the UK’s Double Tax Treaties and Obtain a Tax Residence Certificate?
As a UK LLP is not taxable, it cannot obtain a tax residence certificate. In addition, as a UK LLP is not subject to tax on its profits, it cannot enjoy the benefit of the UK’s network of double tax treaties.
The relevant jurisdiction to obtain a tax residence certificate and for the application of double tax treaties, is the country of residence of the LLP members.
Can a UK LLP register for VAT in the UK?
In theory as a UK LLP is considered to be a body corporate for VAT purposes, it should be possible to register an LLP for VAT, even if the LLP is not trading in the UK.
In practice however, a UK LLP without a UK trade, UK place of business or UK members will probably find it difficult to register for VAT in the UK.
Can a UK LLP which has no UK Members, UK Trade or Source Income have a UK Virtual Office?
A UK address and telephone answering service are not on their own sufficient to create a permanent establishment in the UK.
If all activities are undertaken outside the UK, having a UK virtual office should not cause non-UK members of a UK LLP without a UK trade or source income to have a UK tax liability on the profits of such an LLP.
Who has the Powers of Management of an LLP ?
The powers of management rest with the members of an LLP. It is sensible to have a members’ agreement which sets out the authority of the members to bind the LLP.
Where a member’s authority is limited, if the member acts broadly within the ambit of the LLP’s business, his acts are likely to bind the LLP. This is the case even if the member was acting outside of his authority, as defined in the members’ agreement, provided that the party with which the member is dealing does not know of such limitations to the powers of the member.
Do UK LLPs have to be Audited?
The members of a LLP are obliged to prepare a balance sheet and profit and loss account for each financial year of the LLP. These accounts, together with a copy of the Auditor’s report (where applicable) must be delivered to the Registrar of Companies. The accounts will then be in the public domain and are open to inspection.
LLPs that are regarded as small are exempt from an audit requirement. To qualify as a small LLP the LLP must have gross assets of not more than £3.26 million, and its turnover must not exceed £6.5 million. In addition, the LLP must not be part of a group where a public company is a member, or where the group is not defined as small.
It should be noted that even where an audit is not required, members are still required to prepare and file true and fair accounts.
Is there a Minimum Capital Requirement?
There is no minimum capital requirement for the formation of an LLP. An LLP must, however, have at least two members. The members may be corporate bodies and may be incorporated and resident anywhere in the world.
Are there any Activities for which an LLP should not be Used?
An LLP is tax transparent if it is engaged in a trade, profession, or business with a view to making a profit. An LLP is therefore not tax transparent for clubs, charities or similar organisations.
There is some anti-avoidance legislation and, in particular, if a pension fund is a member of a LLP which invests in property, that LLP will not be tax transparent.
UK resident members of an investment LLP will not be able to offset interest charges against income they receive from such an LLP when calculating their taxable income. This does not however affect non-UK members of an investment LLP that has no UK source income.
Summary
LLPs are becoming increasingly popular. This is largely due to the fact that no personal liability falls on a member of an LLP for contracts or debts of the LLP and there is no joint or several liability for the negligence of any other member.
If correctly structured, international business operated by UK non resident members will not be subject to UK taxation, but will, nevertheless, present a UK presence to the outside world.
NOTE: OCI are not legal or tax or financial advisers. Local laws can have an impact. Hence you should seek local legal, taxation and financial advice before committing to establish a structure such as that described above.
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