HM Revenue and Customs (HMRC) won a victory today at the Court of Appeal (31/1/06) over companies with foreign (non-EU) parent companies.

The decision means that foreign owned companies are not entitled to the same compensation as EU-parented companies if they have paid dividends. This claim for compensation arose because the UK subsidiary of a foreign parent which paid a dividend in effect paid its corporation tax earlier than it would have done had it had a UK parent.

The Court of Appeal has in effect upheld the High Court decision in favour of HMRC.  Similar to the High Court, they held that, whilst part of the UK’s ACT legislation did breach the relevant term of the Double Tax Treaty between the UK and (say) the USA, that part of the Treaty had not been implemented by UK legislation. 

Bill Dodwell, tax partner at Deloitte, comments: “Today’s decision does not come as a surprise.  It confirms the High Court decision. When these Double Tax Treaties were negotiated it was not thought the UK’s ACT legislation was contrary to the Double Tax Treaty.”

Notes to editors

This case was part of a Group Litigation Order, the UK equivalent of a US class action.  Many UK companies with foreign (i.e. non-EU) parent companies claimed compensation for, in effect, paying corporation tax earlier than similar companies with a UK parent would have. The claim was under the non-discrimination provision of the relevant Double Tax Treaty.

Under Double Tax Treaties countries allocate taxing rights over certain matters involving both of them. Many such Treaties include ‘non-discrimination’ provisions, under which countries typically undertake not to treat businesses owned from the other country less favourably than domestically-owned businesses.

Until 1999 UK legislation required companies paying dividends to a foreign parent company to pay Advance Corporation Tax (ACT), which was in effect an early payment of corporation tax, to the Inland Revenue. The ACT was set off against the amount of corporation tax payable, which was typically due 9 or more months later.  Similar dividends to a UK parent were not subject to the requirement to pay ACT.

In 2001 the European Court of Justice held, in a case involving a UK subsidiary of the German Hoechst group, that UK legislation contravened aspects of the EC Treaty, as it discriminated against companies which had an EU (but non-UK) parent, as compared to those with a UK parent. The European Court of Justice decided that compensation should be paid to those who had suffered this discrimination. 

Since then many groups have made similar claims, which have been gathered together in a Group Litigation Order. Group Litigation Orders (GLO’s) are broadly the English equivalent of US class actions. The GLO is in turn divided into ‘classes’. This Court of Appeal decision concerned the class which involves UK companies owned by non-EU companies, a very important group, since many UK companies are owned by USA or Japanese parent companies.

Of course the EU Treaty is not directly relevant to non-EU parents, but most such parent companies are from countries which have Double Tax Treaties with the UK. Most Double Tax Treaties include ‘non-discrimination’ provisions which seek to ensure, for example, that UK companies owned from the other country are not treated less favourably than companies with UK owners.

A number of other GLOs have been formed to make claims that other aspects of UK tax law are also contrary to the EU Treaty and have sought damages or restitution before the High Court. Some of these GLOs include classes dealing with non-discrimination under Double Tax Treaties, as well as discrimination under the EU Treaty. The six GLOs to date concern:

• Cross border loss relief;
• Thin capitalisation;
• Controlled foreign companies and foreign sourced dividends;
• Franked investment income;
• ACT, group income elections and treaty tax credits  (see above);
• Foreign income dividends.

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