Entity classification

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FORTHCOMING CHANGE relating to reverse hybrids: On 10 June 2026, the government opened a consultation on proposals which, if implemented, would allow UK resident individual members of US limited liability companies, and other reverse hybrid entities, to treat their holding on a transparent basis for UK income tax and capital gains tax purposes. This is intended to mitigate the high effective tax rates currently suffered by such members as a consequence of having to pay tax on a transparent basis in a foreign jurisdiction, but that entity being classified as opaque in the UK, with the result that double tax relief is not available. The tax treatment for corporation tax purposes would remain unchanged.

It is necessary to characterise overseas entities as with transparent or opaque for UK tax purposes, as this will determine how they (and their members and potentially other persons connected with them) are taxed.

UK case law and HMRC interpretation

UK legislation provides little guidance on whether an overseas entity is to be treated as transparent or opaque for UK tax purposes. However, there have been a number of key cases that have

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