Writing for International Tax Review, associate Guy Bud and partner Matthew Greene of our Tax Litigation and Resolution team reviewed a dispute on tiered partnerships, which raises questions on corporation tax and partnership law.

‘Tiered partnerships’ are a common structure in international tax planning but they raise delicate issues and uncertainty regarding partnership law and tax. A decision in BlueCrest Capital Management v HM Revenue and Customs (HMRC) from October by the Court of Appeal in England and Wales provides valuable clarification.



BlueCrest is an investment management business that was conducted through a limited partnership (LP) in the UK and subsequently became a limited liability partnership (LLP) (‘the UK partnership’). A share of the equity needed to be bought out.

As part of the planning, a complex tiered partnership model was set up, in essence, to allow this to be financed through pre-taxed profits from the UK partnership.

The buyers created an LP in the Cayman Islands (‘the Cayman partnership’) to hold the equity, with a limited company (‘CaymanCo’) as its general partner. CaymanCo became a member of the UK partnership in its capacity as general partner because the Cayman partnership itself had no legal personality under Cayman law.

A commercial lender was used to fund the buy-out. As part of the agreement, a financing company (‘FinanceCo’) joined the Cayman partnership and entered into a complex series of financing arrangements with CaymanCo and the other members to govern loan and interest payments.

The case focused on the mechanism for loan repayments. ‘Superprofits’ (profits above a given level set out in the agreement) arising to the UK partnership would be allocated to CaymanCo, which was required to make an equivalent payment to its holding company (‘CaymanHoldCo’). CaymanHoldCo would put the funds back into CaymanCo by capital subscription and CaymanCo, finally, would make the payment to FinanceCo.


The appeal

HMRC argued that the BlueCrest scheme was ineffective for UK corporation tax. It argued that CaymanCo was taxable on the superprofits allocated to it (‘the profit allocation issue’) and that no deductions were possible for the interest payments (‘the interest deduction issue’). The taxpayers appealed unsuccessfully to the First-tier Tribunal (FTT) and Upper Tribunal (UT) before reaching the Court of Appeal.

The taxpayers raised two arguments in relation to the profit allocation issue. They argued that the superprofits had not been allocated through the UK partnership to CaymanCo but directly to FinanceCo, raising the wider question of the exact relationship created between the UK partnership and the Cayman partnership (‘the partnership issue’).

In the alternative, the taxpayers argued that the profits allocated to CaymanCo had actually been held as a fiduciary for the other members of the Cayman partnership in its capacity as general member and that this was not taxable profit (‘the fiduciary issue’).


The partnership issue

The taxpayers’ position was that the buy-out had created an ‘omnibus partnership’ in which all members of the Cayman partnership, including, crucially, FinanceCo, became members of the UK partnership and that profits were therefore allocated to them directly without CaymanCo’s involvement.

Rejecting this analysis, the FTT originally concluded that the Cayman partnership was actually a separate ‘sub-partnership.’ The UT broadly endorsed its reasoning.

After considering the position at some length, the Court of Appeal agreed. Some key points were emphasised:

  • Although it was possible for members of one partnership to become part of another in similar circumstances, there was no legal presumption to this effect. The facts also provided no basis to believe that FinanceCo and the other members of the Cayman partnership had been intended to join the UK partnership or, in fact, did;
  • Specific legal rules govern LPs and LLPs. Cayman law prevented members of a limited partnership other than the general member from being involved in its business. FinanceCo was, therefore, directly prohibited from involvement with the Cayman partnership’s business, unlike CaymanCo; and
  • CaymanCo had unambiguously fulfilled the necessary formalities and became part of the UK partnership. This was not the case for FinanceCo or the other Cayman partnership members.

CaymanCo had, therefore, unambiguously received the allocated profits from the UK partnership and not FinanceCo.


The fiduciary issue

Profits received in a ‘merely fiduciary or representative capacity’ are not generally subject to corporation tax (section 6 of the Corporation Tax Act 2009 (CTA)). The taxpayers pointed out that the profits allocated to CaymanCo as general partner of the Cayman partnership were held in such a capacity for the other members as a matter of Cayman law. The UT rejected this argument on the basis that section 6 had no applicability to the specific rules for calculating corporate profits in a partnership context.

Although the Court of Appeal rejected the UT’s analysis, it agreed with HMRC that CaymanCo was not acting in such a capacity based on a “realistic” analysis drawing on the so-called Ramsay approach to statutory interpretation (which requires the court to take a realistic view of the facts). CaymanCo might receive profits in principle as a fiduciary, but it was also committed to participation in a pre-ordained series of transactions that would ultimately result in it receiving beneficial ownership through the capital subscription by CaymanHoldCo.


The interest deduction issue

CaymanCo’s entitlement to claim interest deductions depended on there being a trading loan. This meant a loan ‘for the purposes of the trade’ (section 297(1) CTA 2009) carried out by CaymanCo in the UK as a member of the UK partnership.

The FTT and UT had treated this as a factual issue. They pointed out that the loan had been used for the purposes of the Cayman partnership’s investment in the investment-management trade rather than the UK partnership’s underlying investment-management trade.

The Court of Appeal affirmed the position of the FTT and UT. It rejected the taxpayers’ argument that the loan’s purpose was a question of law and that the test was automatically satisfied.



Although some of the conclusions will doubtless cause concern, especially around interest deductibility, given the earlier findings of fact, the overall outcome in the context of this arrangement and the application of Ramsay is perhaps unsurprising.

Many will welcome the court’s rejection of the UT’s approach, which could have the effect of imposing tax on profits received by corporate members acting in a genuinely fiduciary capacity. ‘Tiered partnership’ structures may need to be re-examined with particular care.



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