The Advocate General (AG) today (23/1/06) delivered a forceful opinion in favour of rejection of the ACT Class IV group litigation order claim at the Court of Appeal.  In the case, representative claimants from Italy, France and Germany argued that the EU treaty required that the UK treat parent companies resident in all member states equally and give full tax credits (typically at 25% of the dividends paid) to all, or at least give those to which a Dutch parent would have been entitled (typically about 7% of the dividend paid).  However, the AG stated that whilst fair treatment was required, equal treatment was not.  As a consequence, the UK was entitled to enter into different tax treaties with different countries and did not need to offer the same benefits to everyone. The opinion follows the judgement in the D Case, decided in 2005, where a broadly similar argument was rejected by the European Court of Justice.  There was no need to give full tax credits as any disadvantage caused by not giving them arose from the division of tax jurisdiction between national tax systems, which was not contrary to the EU Treaty.

AG Geelhoed noted that this is “...an area where predictability and legal certainty are crucially important, so that Member States can plan their budget and design their corporate tax systems on the basis of relatively reliable revenue predictions.” This perhaps gave a clue as to his reasoning.

Bill Dodwell, tax partner at Deloitte, comments: “This is another welcome opinion for EU Governments.  It follows the trend over the last year, where few claimants have succeeded winning large tax refunds. This opinion was largely expected, following the D case. The claimants’ argument that full tax credits were due was breathtakingly optimistic.”

Notes to the Editor
This case is part of the ACT Group Litigation Order, the UK name for a class action.  Many UK companies with EU parent companies claimed compensation for, in effect, paying corporation tax earlier than similar companies with a UK parent would have.  As noted below, however, the claimants in this case have made more ambitious claims. 

This case concerns the UK corporation tax system as it was from 1973 until 1999.  UK legislation then 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.  Dividends also had tax credits equal to the ACT paid.  These credits normally reduced or eliminated the liability to UK tax of a UK resident individual in respect of the dividends.  However in some circumstances the tax credits could be refunded, for example to charities, pension funds, individuals with low income. Under certain double tax treaties, part of the tax credit was refunded to foreign corporate shareholders.

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 discrimination was that UK subsidiaries of EU parents paid corporation tax earlier than a UK subsidiary of a UK parent would have.  The European Court of Justice decided that compensation should be paid to those who had suffered this discrimination. 

This case concerns rather more ambitious claims.  The Hoechst case sought compensation for early payment of corporation tax, which is in most cases would have been for 1% to 1.5% of the dividend.  In this case (referred to as Class IV) the claimants sought compensation for the fact that the UK had entered into Double Tax Treaties with other EU member states, which contained different provisions.  Under some treaties (for example France, The Netherlands – with limitations in both cases), tax credit refunds were paid to non-UK resident companies in relation to dividends received from UK resident companies  However, no such tax credit refunds were paid under other treaties.  The claimants argued that the UK was not entitled to deal differently with different member states.  If successful the amount of compensation could potentially have been 25% of the dividend paid (although typically the refund under most treaties was about 15% of the cash dividend).  At the hearing Counsel for HM Revenue & Customs stated the total claims in this class of the Group Litigation Order could be as much as £1.5 billion.  This part of the Group Litigation Order was referred to the European Court of Justice by the English High Court in August 2004. The hearing took place in the European Court of Justice in Luxembourg on 22 November 2005.

Under the procedures of the European Court of Justice the Advocate General prepares his or her opinion following the public hearing, where the Advocate General and the Judges hear the arguments of both parties and can put to them any questions they consider relevant to the case. The Advocate General then performs a detailed analysis of the legal aspects of the case and sets out his or her opinion.  He or she does this independently of the Judges. The Judges will now deliberate on the basis of a draft judgement (which is drafted by one of them, called the Judge-Rapporteur) and suggest amendments. When the final text is agreed, the judgment will be delivered in the European Court of Justice.  Normally this process takes several months.

Since the Hoechst case in 2001 many groups have made similar claims to Hoechst, and these have been gathered together in a Group Litigation Order.  Group Litigation Orders are broadly the English equivalent of US class actions.  The ACT (Hoechst) Group Litigation Order is in turn divided into ‘classes’.  This case concerned class IV.

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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