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Applicability of India – UK tax treaty to UK LLPs and Partnership firms

Bharath Chopra comments on the UK India tax treaty in the context of the transparency of UK Limited Liability Partnerships

The applicability of the India – UK tax treaty to UK LLPs and Partnership firms has been one of the most debated issues in Indian court rooms.

As per the prevailing tax treaty between India and the UK, the term ‘person' has been defined to include ‘an individual, a company, a body of persons and any other entity which is treated as a taxable unit under the taxation laws in force in the respective Contracting States.'

However, to determine whether such a "person" is eligible to the tax treaty, it would be necessary to examine if the LLP is also a "resident" of the UK within the meaning of this term under the India UK tax treaty.

Article 4(1) of the India UK tax treaty defines "resident of contracting state" to mean any person who under the laws of that state is liable to taxation therein by reason of his domicile, residence, place of management etc.

Not only does the UK LLP have to be a ‘person' but it should also be liable to tax in the UK under its domestic laws.

As per the domestic laws of the UK, partnership firms are pass-through entities and not taxable per se. Therefore, one could take a view that a partnership firm/LLP is not eligible to claim the benefits of the UK/India tax treaty.

However, with effect from December 2013, Article 4(1) of the India/UK tax treaty which defines the term ‘resident of a Contracting State', was amended to provide that only so much of the income derived by a partnership which is subject to tax in a Contracting State as the income of a resident of such Contracting State either in its hands or in the hands of its partners, would be eligible for claiming benefits under the India-UK Tax Treaty.

Hence, in the case of a UK partnership earning income from India, only so much of the income which is subject to tax in the UK as the income of the UK resident partner would be eligible for India-UK Tax Treaty benefits. Now this results in a dispute on taxability of transparent UK entities in India leading to uncertainty in their tax outcomes.

Given that UK partnership firms are per se not a taxable unit, there is ambiguity on the applicability of the India-UK DTAA for UK partnership firms.

The Calcutta High Court in the case of P&O Nedlloyd Ltd & Ors (W.P. no. 457 & 458 of 2005) has upheld the eligibility of India-UK tax treaty benefits to UK partnership firms. The Mumbai Income-tax Appellate Tribunal (‘Tribunal') in the case of Linklaters LLP vs. ITO extended the benefits under the India-UK Tax Treaty to a UK Limited Liability Partnership (‘LLP'). The Tribunal observed that where a partnership is taxable in respect of its profits, not in its own right but in the hands of partners, as long as the entire income of the partnership firm is taxed in the country of residence (i.e. UK), treaty benefits could not be denied.

Similarly, the Mumbai Tribunal in the case of Clifford Chance vs. DCIT [which was subsequently affirmed by the Bombay High Court] also granted benefits of the India-UK Tax Treaty to a UK partnership firm.

 

Disclamer

The information provided in this publication are put forward for further consideration only and are not intended to be acted upon without independent professional advice. Neither Jordans Trust Company Limited nor its associated group companies, nor any employees or directors of these companies can accept any responsibility or liability for any loss occasioned to any person no matter howsoever caused or arising as a result of or in consequence of action taken or not taken in reliance on the contents of this publication.

Guest author:


 Bharath Chopra


Bharath Chopra

Managing Partner, Intellect Business Advisors LLP
T: +91 044 4352 4114
E:  bharath@intellectadvisors.in


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