GE Financial Investments v Revenue and Customs Commissioners

This appeal concerned the interpretation of Article 4(1) of the US/UK double tax Convention and whether a UK incorporated company whose shares were "stapled" to a US corporation by reason of s.269B of the US Internal Revenue Code was to be treated as a resident of the United States for treaty purposes (Issue 1). The court also considered whether the taxpayer carried on "business" in the United States through a permanent establishment (Issue 2).

The Court of Appeal held that Article 4(1) must be read to require both (a) liability to taxation on a residence or worldwide basis and (b) a connecting factor or attachment of the kind exemplified in the Article (domicile, residence, place of management, place of incorporation or a criterion of a similar nature). A mere statutory deeming which brings a company within the scope of domestic tax in another State (here s.269B) does not of itself amount to a "criterion of a similar nature" unless it establishes a substantive connecting factor between the entity and that State. Accordingly the Upper Tribunal erred in treating GEFI as a United States resident for Convention purposes by reason only of s.269B. The First-tier Tribunal’s conclusion that GEFI was not carrying on business in the United States through a permanent establishment was, however, upheld as an open evaluative finding of fact for that tribunal.

Background and parties: The appeal was brought by HM Revenue & Customs against the Upper Tribunal’s decision that GE Financial Investments (a UK incorporated company) was a United States resident for the purposes of the US/UK double tax Convention. GEFI argued that it was a United States resident by reason of share "stapling" which, under s.269B of the US Internal Revenue Code, causes a stapled foreign corporation to be treated as a domestic corporation for US federal tax purposes. GEFI also maintained, alternatively, that the First-tier Tribunal was wrong to find that it was not carrying on business in the United States through a permanent establishment.

Procedural posture: The dispute arose after the First-tier Tribunal (FTT) held that GEFI was not United States resident for treaty purposes and that it was not carrying on business in the United States; the Upper Tribunal (UT) reversed on residence but upheld the FTT on the carrying-on-business point. HMRC appealed to the Court of Appeal. Key prior decisions in the path included the FTT decision ([2021] UKFTT 0210 (TC)) and the UT decision ([2023] UKUT 00146 (TCC)).

Nature of relief sought: HMRC sought to overturn the UT’s finding of treaty residence and to reinstate the FTT’s conclusion that the United Kingdom was not required to give double tax relief for US tax paid on the relevant interest income. GEFI sought to uphold the UT on residence and, in the alternative, to maintain the UT was wrong to have upheld the FTT on the carrying-on-business issue.

Issues framed:

• Issue 1: Whether the share staple and the operation of s.269B meant that GEFI was a resident of the United States for the purposes of Article 4(1) of the Convention.
• Issue 2: If GEFI was not resident of the United States for treaty purposes, whether it carried on business in the United States through a permanent establishment for the purposes of Article 11 read with Article 7.

Facts and context: GEFI was a UK incorporated company whose shares were stapled to the shares of GEFI Inc (a Delaware corporation). The partners formed a Delaware limited partnership (LP) in which GEFI was the 99% limited partner and GEFI Inc the 1% general partner. The LP held five loans to GELCO and interest on those loans had a US source. The LP was treated as tax-transparent in both jurisdictions such that the partners were taxable on the LP income. The structure was implemented for tax reasons, and s.269B caused the stapled UK company to be treated for US federal tax as a domestic corporation taxed on worldwide income.

Court’s reasoning: On treaty interpretation the court applied the Vienna Convention approach and relevant authorities and OECD Commentary, and emphasised that Article 4(1) requires the ordinary meaning of the terms in their context and in the light of object and purpose. The court determined that Article 4(1) does not equate treaty residence simply with being subject to taxation on a worldwide basis: the words "liable to tax therein by reason of" specific connecting factors show that the taxable liability must arise by virtue of a substantive connection of the kind listed or of a similar nature. The inclusion of place of incorporation and citizenship in the Convention (a departure from the OECD MTC wording) reinforced that the focus is on connecting factors of territorial or legal attachment. The court held that s.269B is a US statutory deeming provision affecting domestic tax treatment but does not, without more, create the requisite connecting factor in the sense intended by Article 4(1). Consequently the UT erred in treating GEFI as US resident for Convention purposes. The court also held that the FTT’s finding that GEFI (through the LP) was not carrying on business in the United States was a permissible evaluative conclusion on the facts and should stand.

Result and implications: The Court of Appeal allowed HMRC’s appeal on Issue 1 and set aside the UT’s finding of US residence; it dismissed GEFI’s appeal on Issue 2, thereby reinstating the FTT’s overall result that the United Kingdom was not required to give double tax relief for the US tax paid on the interest in dispute for the relevant periods. The court noted the practical financial significance of the decision for the parties and commented on the proper approach to treaty interpretation and the limited role of unilateral domestic deeming provisions as establishing treaty residence.

Appeal allowed in part. The Court of Appeal allowed HMRC’s appeal on Issue 1 (residence) and set aside the Upper Tribunal’s conclusion that GEFI was a United States resident for Convention purposes, holding that Article 4(1) requires a substantive connecting factor (in addition to liability to worldwide tax) and that s.269B does not of itself constitute a criterion "of a similar nature". The court dismissed GEFI’s challenge to the FTT’s finding on Issue 2 (carrying on business), holding that the FTT’s evaluative conclusion that GEFI (via the LP) was not carrying on business in the United States was open on the evidence.

Appeal from the Upper Tribunal (Tax and Chancery Chamber) ([2023] UKUT 00146 (TCC)), which had reversed the First-tier Tribunal ([2021] UKFTT 0210 (TC)) on the question of treaty residence. The Court of Appeal ([2024] EWCA Civ 797) allowed HMRC’s appeal on residence and upheld the FTT on the carrying-on-business issue.