United Kingdom Limited Liability Partnerships (LLPs)

United Kingdom LLPs are widely used for international tax planning. The LLP is transparent for tax purposes which means that it will never be liable to pay UK corporation tax. Instead income arises on the partners directly. For example a UK LLP formed by two members who are companies in a zero tax country (such as the Isle of Man, St Kitts and Nevis, the BVI etc) will provide a UK incorporated entity which does not pay any tax anywhere. The UK enjoys an excellent international reputation however in spite of this no due diligence documents (such as passports, proof of address etc) on partners is required on formation. Nevertheless diligence may be required at other points in the company’s life, such as on the opening of a bank account. UK LLPs provide a very cheap and simple way to form a limited liability vehicle which benefits from the UK’s excellent reputation, its membership of the European Union but if correctly structured does not pay any tax.

The formation of LLPs attracts a negligible cost, registration is almost immediate and there is no requirement to submit a members agreement or any due diligence documents (passports proof of address etc). The only requirement is an address in the UK which all formation agents provide at little cost.

Limited Liability
Limited liability entities have their own identity, they can own property in their own name, open bank accounts, conduct business, sue and be sued and provided they are operated legally their liability will remain limited to their own assets so any assets held by the partners will not be forfeit in the event of the LLP being sued.

LLPs do not have directors or secretaries, their management is handled by the members directly.

An LLP must have at least two members and may have more. There is no requirement for any members to be resident in the UK. Taxation arises on gains in the members hands directly (since the LLP is transparent for tax purposes) so if the members are in an offshore country no tax at all will be payable. Members can be either natural or legal persons (such as a limited company). At least two members must be designated as responsible for statutory compliance (though no measure exists to enforce this requirement on non-UK members).

Objects Clause
There is no requirement (as in some countries) for UK LLPs to declare their trading objectives on formation or to limit their operation to a pre-agreed area. The objects of a UK LLP, like a UK private company are, in effect, unlimited (unless the LLP wishes to impose any restriction in its members’ agreement).

Company Seal
UK LLPs may choose whether or not to have seals.

Accounts and Reporting
UK LLPs are required to prepare and submit annual accounts which may need to be audited depending on the size of turnover and balance sheet. Please see here for the current audit thresholds. These accounts are public record. Also depending on the size of turnover an annual return containing information on the amount remitted to the majority partner may be required however in most cases this will be a foreign newly registered company with no apparent link to the beneficial owner.

UK LLPs can bank anywhere however if they bank in the UK there is a reporting obligation to the UK authorities. This safeguard can easily be avoided by banking elsewhere and is inadequate to ensure effective reporting on the operation of UK LLPs. Most UK formation agents also provide offshore banking facilities for UK LLPs mainly in the Caribbean, Cyprus, Channel Islands and other offshore centres.

Use by UK Domicile Residents
The above system has been used by UK domicile residents to move the majority of their locally arising profits offshore by creating an LLP splitting profits 5% for a local limited company (paying a token amount of UK corporation) and 95% for an offshore company (usually in the Channel Islands or the Isle of Man). This extensive use by UK domicile residents of UK LLPs with foreign partners to avoid tax has attracted a great deal of local attention and it was announced that it is under investigation in the 2013 budget. This means that where the Scheme involves offshore countries (particularly the Isle of man or Channel Islands) it is very likely to come under attack. There is however still scope for the use of another foreign partners in another EU member state (such as Malta) provided that there is some genuine substance/commercial realism to the operation. The UK has a highly sophisticated anti-avoidance system (one of the most advanced in the world) which focuses amongst other things on the the artificial allocation of profits to partners. This rule is specifically targeted at the 95% / 5% offshore/onshore profit split explained above. In light of the above LLPs (especially those in offshore countries) are not recommend for UK domicile residents. For residents and nationals of other countries UK LLPs remain a very attractive product and generally fare well against anti-avoidance rules given the UKs excellent international reputation.

Limitation on Use
LLPs can be used for any commercial purpose, if a non-commercial purpose is desired a foundation should be considered. LLPs can be used for holding vehicles although their use as a trading entity is much more common since the reason for their creation is generally to establish a ‘shop-front’ presence in a highly reputable country.