A Limited Liability Partnership (LLP) is a legal entity that combines the organisational flexibility and tax status of a partnership, while also providing limited liability for its members. This limited liability is possible because an LLP has a legal ‘personality’ that is separate from its members. Each partner’s liability is, in general, limited to his or her agreed contribution to the partnership.
LLPs are ‘tax transparent’, which means that each member – rather than the partnership itself – is assessed to tax on their share of the LLP’s income or gains. Any non-UK source profits or gains made by an LLP will not be subject to UK tax, except in so far as its members are UK resident individuals or companies. There are exceptions to the general rule that LLPs are tax transparent, but these do not apply if the LLP is engaged in a trading business.
There are no restrictions on the tax residence or nationality of the members of an LLP. Therefore, if the members of an LLP are non-resident and its income is non-UK sourced, the LLP itself will not be subject to UK taxation.
In determining residence status, a UK LLP will be deemed resident in the jurisdiction from which it is controlled, which would ordinarily be the jurisdiction in which its members are situated. There is an obligation for an LLP to file an annual partnership tax return whether the partners are taxed or not.
It should be noted that LLPs with overseas members cannot generally avail themselves of the UK’s tax treaty network because of the LLP’s tax transparent status.