The Indian tax authorities have denied treaty benefits to fiscally transparent entities such as foreign partnership firms and limited liability corporations (LLCs) on the ground that such entities are not liable to tax in their home country and do not qualify as tax residents of that country.  The taxpayers have been claiming treaty benefits by arguing that the members of such firms/LLCs, who are tax residents of the same country, pay taxes in that country on the income earned by the firms/LLCs.

In the recent General Motors USA tax case, this issue arose in the context of a US-based LLC. The Delhi Tribunal has held that as the income of the LLC is clubbed in the hands of its owner who merely discharges the tax that is assessable on the LLC, an LLC is essentially “liable to tax.” Further, the tax residency certificate (TRC) supports this fact and also confirms the status of the taxpayer as a body corporate. The Mumbai Tribunal had, in the Linklaters tax case, allowed the benefit of India-UK treaty to a fiscally transparent partnership firm, i.e., Linklaters.

It will be interesting to see how the courts implement this ruling especially as the Central Board of Direct Taxes has chosen not to adopt Article 3 of the MLI (multilateral convention to implement tax treaty related measures to prevent base erosion and profit shifting), which grants treaty benefits to fiscally transparent entities.