The Commissioners for HMRC v GE Financial Investments

For a company to be a treaty resident under Article 4(1), comprehensive taxation must arise by reason of an actual legal or factual local connection within an enumerated criterion, or one of a similar nature. Liability to tax on a worldwide basis is necessary but does not itself establish treaty residence.

A domestic tax fiction which treats a foreign company as domestic does not alter the real-world facts for treaty purposes. Share stapling based on ownership and control does not create a connecting criterion of a similar nature. Whether a company carries on business remains a qualitative, multi-factorial inquiry; passive holding of affiliate loans without strategic management may not amount to business.

HMRC appealed from the Upper Tribunal’s decision, [2023] UKUT 00146 (TCC), that GE Financial Investments, a United Kingdom-incorporated company, was resident in the United States for the purposes of the United States/United Kingdom double tax convention. That conclusion entitled it to credit for United States tax paid on interest income.

The First-tier Tribunal had reached the opposite conclusion on residence and had also held that the company was not carrying on business in the United States through its interest in a Delaware limited partnership. The Upper Tribunal reversed the residence conclusion but upheld the business conclusion. HMRC challenged the first ruling; the company cross-appealed the second.

The central questions were whether share stapling made the company United States-resident under Article 4(1) and, if not, whether the partnership’s activities amounted to carrying on business for the purposes of Articles 7 and 11.

1. HMRC’s appeal was allowed and the company’s cross-appeal dismissed. The Upper Tribunal’s decision was set aside on residence and upheld on business. The result was to restore the First-tier Tribunal’s conclusion that the United Kingdom was not obliged to grant double-tax relief for the United States tax on the interest income.

2. Article 4(1) required two elements. There had to be liability to comprehensive, residence-basis taxation and that liability had to arise by reason of a qualifying local connection. The listed criteria, followed by the ejusdem generis expression “any other criterion of a similar nature”, were not mere examples of rules producing worldwide taxation. They identified legal or factual links between the person and the Contracting State.

3. The company was incorporated in the United Kingdom. Section 269B of the United States Internal Revenue Code treated it as a domestic corporation for United States tax purposes because its shares were stapled to those of a United States company. That tax fiction did not make it actually incorporated in the United States or satisfy another enumerated criterion. Applying the real-world approach in Fowler, a deeming provision of that kind did not govern treaty characterisation.

4. The statutory conditions for stapling were also not a criterion of a similar nature. They concerned ownership and control, rather than a legal or factual connection between the company itself and the United States capable of justifying comprehensive taxation. The company was therefore solely United Kingdom-resident for Convention purposes.

5. On business, the First-tier Tribunal had made no material error of law. A company’s gainful use of assets may give rise to a strong prima facie inference of business, but it is not conclusive. The inquiry is qualitative and fact-sensitive. The partnership merely held a small number of affiliate loan receivables. Its general partner made no strategic lending decisions and had very limited involvement. The tribunal was entitled to regard this as passive activity rather than carrying on business.

• Court of Appeal (Civil Division): HMRC’s appeal was allowed and GE Financial Investments’ cross-appeal was dismissed: [2024] EWCA Civ 797.

• Upper Tribunal (Tax and Chancery Chamber): Reversed the First-tier Tribunal on United States treaty residence, but upheld its conclusion that the company was not carrying on business: [2023] UKUT 00146 (TCC).

• First-tier Tribunal: Held that the company was not United States-resident for Convention purposes and was not carrying on business in the United States: [2021] UKFTT 0210 (TC).