In Six Continents Ltd and Another v HMRC [2016] EWHC 2426 (Ch), the High Court held that the claimants are entitled to a credit at the foreign nominal rate (FNR) of corporation tax in respect of dividends paid from a Dutch subsidiary but are not entitled to a credit in respect of dividends linked to the return of share capital.

Background

Six Continents Ltd and Six Continents Overseas Holdings Ltd (the taxpayer) are claimants in the long running CFC and Dividend GLO case concerning historic aspects of the UK's corporation tax system which operated in contravention of EU law.

The taxpayer claimed restitution from HMRC in respect of UK corporation tax unlawfully charged on dividends paid to it by Six Continents International Holdings BV (SCIH), its wholly-owned subsidiary in the Netherlands.

The dividends were paid to the taxpayer between 1993 and 1997. They were charged to tax under Schedule D, Case V (the Case V charge) - "tax in respect of income arising from possessions out of the United Kingdom" (sections 9 and 18, ICTA 1988, as in force during the relevant years).

There was no dispute between the parties as to the unlawfulness of the Case V charge as the Court of Justice of the European Union (CJEU) had determined that the Case V charge was unlawful some years earlier in Case C-35/11 FII Group Litigation [2013] STC 612. The instant case concerned the narrow issue of the mechanism by which the taxpayer's claims were to be computed. Specifically:

1. whether the taxpayer was entitled to a credit at the Dutch standard rate of corporation tax for so much of the dividends as were derived from adjustments to the pre-tax commercial (or accounting) profits, which in general prevent the recognition for tax purposes of revaluations (upwards or downwards) of capital assets before they are disposed of;

2. whether the taxpayer was entitled to a credit at the Dutch standard rate of corporation tax for so much of the dividends which arose from the liquidation of a subsidiary of SCIH, and formed part of the accounting profits of SCIH for 1995; and

3. whether the taxpayer was entitled to a credit at the Dutch standard rate of corporation tax for so much of the dividends as were sourced from the share premium account in a Dutch subsidiary of SCIH.

High Court judgment

On the first issue, the taxpayer argued that the relevant profits were subject to Dutch corporation tax despite being excluded during the calculation process as a consequence of other domestic rules.

In the view of Mr Justice Henderson, this approach more closely accorded with the reasoning of the CJEU and that the taxpayer should receive a credit at the FNR of tax in order to mitigate the effect of double taxation.

On the second issue, the Judge found that the taxpayer was entitled to credit at the FNR of tax in respect of the dividends which arose from the liquidation of a subsidiary of SCIH, notwithstanding the fact that the dividends were subject to an exemption under the Dutch tax code.

On the third and final issue, which concerned dividends which had originated in the share premium account of a subsidiary of SCIH, the taxpayer argued that a credit must be given at the FNR because in a purely domestic circumstance the UK would not tax a dividend passing from subsidiary to parent even where the effective rate of tax applicable to that subsidiary was nil. By contrast, the fact that the dividend had crossed from the Netherlands to the UK meant that a corporation tax charge was payable purely because of that cross-border movement.

HMRC argued that the only reason the tax charge arose was because the UK operated an imputation system of taxation which the CJEU had found it was entitled to operate provided it gave a credit for foreign profits which had been subject to tax. In this instance, there were no profits and therefore no credit was due.

The Judge, finding for HMRC on this point, emphasised that the UK did not tax returns of capital made by UK-resident companies in a preferential way to returns by non-resident companies. Rather, returns of capital by non-resident companies were outside the scope of UK tax and therefore irrelevant to the analysis following the decision of the CJEU in FII which required the focus to be on the extent of taxation on underlying profits. Since, in this case, there were no underlying profits, the Case V charge was compliant with EU law.

Comment

As the Judge made clear at the outset of his judgment, the scope of the decision in this case is narrow. Now that the important issue of principle has been determined, broadly, in the taxpayer's favour, the dispute with HMRC has moved on to highly technical areas relating to quantum and quantification. No doubt this dispute will rumble on for some time to come.

A copy of the judgment can be found here.