Background

The Irish High Court judgment in the appeal by way of case stated taken by Susquehanna International Group Ltd and two related companies was published on 3 October.

The case concerned the ability of three Irish tax resident subsidiaries of a Delaware LLC (“the LLC”) to avail of the Irish group loss provisions under Section 411 of the Taxes Consolidation Act 1997 (“Group Relief”). The Irish Revenue Commissioners refused the claim on the basis that the conditions for Group Relief were not satisfied because the parent (the Delaware LLC) was not a “company” for the purposes of Group Relief and was not resident in a tax treaty jurisdiction under Article 4 of the US/Ireland Double Tax Treaty (“US/Ireland DTA”).  The LLC was a disregarded entity for US federal income tax purposes. The interests in the LLC were held by a limited partnership, that in turn, was held by five S Corporations, held by six individuals. All entities were tax transparent so that the Irish companies were held by six individuals for US federal income tax purposes.

The Tax Appeals Commission

The taxpayer argued that the denial of group relief contravened the non-discrimination clause contained in Article 25 of the US/Ireland DTA. The Tax Appeal Commissioner (“the Commissioner”) found that the taxpayer was entitled to claim Group Relief on the basis that the LLC was considered a “company” and was US tax resident under Article 4 of the US/Ireland DTA. The Commissioner found that because an LLC enjoys perpetual succession under Delaware law, it is a body corporate for the purposes of Group Relief. In finding that the LLC was tax resident under Article 4 of the US/Ireland DTA, the Commissioner held that, the application of a literal interpretation of the US/Ireland DTA resulted in the LLC not being considered tax resident in the US because it was not itself “liable to tax” there. However, by virtue of a purposive interpretation of the US/Ireland DTA, the LLC was tax resident pursuant to Article 4 of the US/Ireland DTA.

By finding as such on these two matters, the Commissioner did not make a finding on whether Article 25 of the US/Ireland DTA was infringed by the Irish Revenue’s position.

The High Court Judgment

It is important to note that the question of whether the LLC could be considered a body corporate was not before the High Court as Revenue conceded this point. The examination by the High Court focused on:

• Whether the fiscally transparent status of the LLC deprives it of the ability to rely on the anti-discrimination provisions of the US/Ireland DTA.
• Independently of the provisions of the US/Ireland DTA, whether the fiscally transparent nature of the LLC means that the Irish taxpayers are not entitled to Group Relief.

The Court focused its examination on Article 4 of the US/Ireland DTA and whether the LLC could be considered US tax resident for the purposes of that Article. The Court declined to follow the Appeal Commissioner’s purposive approach to the US/Ireland DTA, although noting that the taxpayer did not advance arguments before him that sought to stand over this analysis of the Commissioner. The taxpayer’s arguments focused on whether the LLC could be considered “liable to tax” for the purpose of establishing residency for tax treaty purposes.

In response to a submission of the Taxpayer, the Court rejected the argument that the LLC is liable to tax on the basis that it is within the scope of tax in the US, albeit that its profits are taxed at the member level because the argument ignores the fundamental legal difference between the taxation of a company and the taxation of its members. Having given much consideration, the Court declined to follow the reasoning of a Canadian case that found a fiscally transparent Delaware LLC should be considered liable to tax and therefore US tax resident under the Canadian/US Tax Treaty. 

The Court concluded that the LLC was not liable to tax and therefore not resident within the meaning of Article 4 of the US/Ireland DTA. The Court found that this was neither anomalous with the objectives of the US/Ireland DTA nor the Protocol to the US/Ireland DTA. The Court subsequently concluded that the LLC was not resident in a tax treaty jurisdiction and as such the Irish subsidiaries did not satisfy the test to claim Group Relief.

Finally, the Court agreed with Revenue, that in applying Article 25 of the US/Ireland DTA, the discriminatory measure is to be judged by reference to the direct effect on the taxpayer and not on persons such as the ultimate shareholders.

Key Takeaways

While this case is an important precedent, the particular facts, and the role of the individual shareholders above the S corporations were a decisive consideration in the judgment. Therefore, we are working with clients to examine the particular facts of their own group structure in assessing the impact of this Judgment on the Irish subsidiaries’ ability to claim Group Relief were the LLCs that own Irish companies are part of a US consolidated corporate group.

On a broader level, we have previously made submissions to Irish policy makers that increased certainty could be brought to entity classification if a policy shift was made to apply the tax categorisation to an entity instead of considering the corporate/commercial characteristics. Many hybrid situations could be avoided if this approach were adopted.