US LLC - Transparent or Opaque?

A recent decision of the UK's First Tier Tax Tribunal in Mr Swift v The Commissioners has raised doubts in relation to the UK tax treatment of US limited liability companies (LLCs) and members' interests in such entities. Similar issues were discussed and ruled on by the Tax Court of Canada in TD Securities (USA) LLC v The Queen last month. In each case the court had to decide whether the appellant was entitled to double tax treaty relief.

For both UK and Canadian tax purposes US LLCs have commonly been considered to be opaque, which contrasts with the US tax position under which (in the absence of an election to the contrary under the "check-the-box" regulations) such entities enjoy tax transparency. Why is the distinction important for tax purposes? The profits of an opaque entity, for example a company, are treated as its own and the company itself is taxed thereon. Members (i.e. shareholders) are then generally only taxed in relation to any profits actually