GE Financial Investments v The Commissioners for HMRC

A person is a treaty resident where, under the domestic law of a contracting state, the person is liable to full taxation there by reason of a listed criterion or another criterion of a similar nature. The connecting criterion need not be a direct territorial or legal connection between the taxpayer and the state. Domestic deeming rules may establish treaty residence, including anti-avoidance rules treating a foreign company as a domestic corporation for worldwide-tax purposes. A foreign company treated as a domestic corporation under the US share-stapling rules was therefore resident in the USA for the UK/USA convention. Whether an enterprise carries on business is context-dependent. Gainful use of corporate assets is prima facie business, but the degree and nature of the activity must be assessed as a whole. The FTT’s conclusion that the appellant was not carrying on business in the USA disclosed no material error of law.

GE Financial Investments Ltd, a UK-resident company, claimed credit for US federal income tax paid on interest income received through a Delaware limited partnership. Its shares were stapled to shares in a US corporation. Under US federal tax law, it was treated as a domestic corporation and taxed on its worldwide income.

The First-tier Tribunal held that the company was not resident in the USA for Article 4 purposes and was not carrying on business in the USA through a permanent establishment. It nevertheless decided a further Article 24 issue in the appellant’s favour. The appellant appealed the findings on residence and business; HMRC challenged the Article 24 conclusion by respondents’ notice. The Upper Tribunal allowed the appeal on residence, upheld the FTT’s conclusion on business, and declined to determine the contingent Article 24 issue.

1. Residence. The UK/USA convention had to be construed in its treaty context, having regard to its object and purpose, the domestic tax laws of both states, the relevant OECD model and commentary, and the background at the time of agreement.
2. The criteria in Article 4(1), including “any other criterion of a similar nature”, identify circumstances in which a state assumes full taxing rights. They do not require a direct physical, legal or territorial connection between the taxpayer and the state. The convention leaves the core definition of residence to domestic law, subject to the exclusion for source-only taxation.
3. Domestic deeming provisions can establish treaty residence. The US share-stapling rule treated the appellant as a domestic corporation because of its direct and indirect links to US-incorporated corporations. It subjected the appellant to US tax on worldwide income in materially the same way as an actual domestic corporation. The appellant was therefore resident in the USA for Article 4 purposes.
4. Business. The meaning of “business” depended on context. Gainful use of a company’s assets was prima facie business, but an isolated authorised act did not necessarily amount to business. The necessary degree of activity depended on the nature of the activity and all the surrounding circumstances. The Lord Fisher indicia remained useful analytical tools but were not a substitute for the governing test.
5. The FTT had considered the activity as a whole and was entitled to find that the appellant’s participation in the limited partnership was passive, sporadic and insufficient to constitute carrying on business in the USA. Any errors concerning the company’s objects or the use of dicta from Town Investments were immaterial and operated in the appellant’s favour. The Article 24 issue was not determined because it was contingent and had been argued only briefly.
6. The appeal was allowed on issue 1. The FTT’s conclusion on issue 2(a) was not disturbed.

• Upper Tribunal — allowed the appeal, holding that the appellant was resident in the USA for purposes of the UK/USA convention. It upheld the FTT’s conclusion on business and declined to determine the contingent Article 24 issue.
• First-tier Tribunal — dismissed the appeal on 8 June 2021, holding that the appellant was not resident in the USA and was not carrying on business in the USA, while deciding the contingent Article 24 issue in the appellant’s favour.