Profits interests in a partnership are often used to compensate service providers for the performance of services for the benefit of the partnership. In the United States, service providers typically do not recognize compensation income associated with the grant or vesting of a profits interest. Income is taxed according to U.S. rules on character and timing as reported by the partnership. The tax treatment of profits interests in the United Kingdom is different. For U.K. tax purposes, the grant or vesting of profits interests may result in compensation income to the service provider. While partnerships and limited liability companies (LLCs) taxed as partnerships are generally treated the same for U.S. tax purposes, in the U.K., LLCs are typically taxed as corporations. As a result, a service provider who receives a profits interest in a partnership or an LLC and is subject to taxation in both the U.S. and the U.K. may experience unexpected tax consequences, including double taxation. Taking a proactive approach to identifying these issues can help taxpayers evaluate potential planning opportunities.

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