In many developed common law legal systems (eg England and Wales, Canada, South Africa, Ireland), the local civil courts would not enforce, whether directly or indirectly, a foreign penal law, revenue/tax law and public law of another state, since to do so would amount to an assertion of sovereign authority by one state within the territory(1) of another and turn local civil courts into a general enforcement arm of foreign governments(2).

Under English law, this is often referred to as ‘Rule 3’ of Dicey, Morris & Collins, The Conflict of Laws which states:

‘English courts have no jurisdiction to entertain an action (1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State; or (2) founded upon an act of state’

The Hong Kong courts have traditionally observed the long-established rule encapsulated in the above ‘Rule 3’.

While it is usually apparent what would amount to direct enforcement of foreign penal or revenue laws, the facts and circumstances which might constitute indirect enforcement (and which would still fall foul of Rule 3) may be less obvious.

In Autonomous Non-Commercial Organization ‘Organizing Committee of XXII Olympic Winter Games and XI Paralympic Winter Games of 2014 in Sochi’ -v- Pico Projects (International) Ltd (No 2) [2021] HKCFI 606 (‘Sochi Judgment’), the High Court of Hong Kong had the opportunity to review and clarify the legal position in Hong Kong in the context of whether allowing enforcement of a Russian judgment in Hong Kong would amount to indirect enforcement of a Russian tax law.

Sochi Judgment - background

The plaintiff was established for the purpose of organising the Olympic and Paralympic Games in Sochi, Russia. The defendant is a Hong Kong-incorporated company.

The plaintiff and the defendant entered into two contracts, pursuant to which the plaintiff leased tents and other structures from the defendant to be used at the Olympic and Paralympic Games back in 2014. The plaintiff had inadvertently failed to withhold the relevant profits tax (as required by the applicable laws in Russia) before making various payments to the defendant.

The plaintiff subsequently discovered the error and demanded the defendant to return an amount equal to the profits tax that should have been be withheld. The defendant refused to comply with the plaintiff’s request.

The plaintiff subsequently commenced arbitration proceedings against the defendant at the Arbitration Court of Krasnodar Region, Russia. The plaintiff ultimately obtained a judgment from the Court of Cassation(3), which, in substance, required the defendant to return the sums that the plaintiff had already paid to the Russian government (this is an important factor which we discuss below) on the basis of unjust enrichment (as defined in the Russian Civil Code) (Cassation Judgment).

Similar to other common law jurisdictions, it is trite that the Hong Kong civil courts will not enforce a foreign penal and revenue law. As such, the main issue which the Hong Kong court had to decide was whether allowing enforcement of the Cassation Judgment would amount to indirect enforcement of a Russian tax law.

Indirect enforcement - general legal principles

In the Sochi Judgment, Recorder Manzoni SC referred to Dicey, Morris & Collins, The Conflict of Laws, which defined indirect enforcement as:

‘Indirect enforcement occurs where the foreign state (or its nominee) in form seeks a remedy, not based on the foreign rule in question, but which in substance is designed to give it extra territorial effect; or where a private party raises a defense based on foreign law in order to vindicate or assert the right of the foreign state. An example of the former is the case of a foreign company in liquidation which seeks to recover from one of its directors assets under his control which the liquidator (appointed by the court at the instance of foreign revenue authorities) would use only for the purpose of satisfying the foreign state’s unsatisfied claim for taxes due from the company.’ (Our emphasis)

Recorder Manzoni SC also undertook a detailed review of the authorities placed before the court and which he acknowledged were not binding on him and he ‘must look at the matter from first principles’.

He referred to Peter Buchanan Ltd. -v- McVey (Note)(4), which was classified as the ‘seminal decision on an indirect enforcement claim’(5), and the Irish Court stated that ‘it is not the form of the action or the nature of the plaintiff that must be considered, but the substance of the right sought to be enforced; and that if the enforcement of such right would even indirectly involve the execution of the penal law of another State, then the claim must be refused.’ (Our emphasis)

And to Williams and Humbert -v- W&H Trade Marks (Jersey) Ltd(6) where the House of Lords held that:

‘The existence of such unsatisfied claim [by the foreign state] to the satisfaction which the proceeds of the action will be applied appears to me to be an essential feature of the principle enunciated in the Buchanan case for refusing to allow the action to succeed.’;

And to Wahr-Hansen -v- Compass Trust Co Ltd(7), where the parties agreed (and the Cayman court adopted) that three prerequisites would need to be satisfied to raise the ‘tax collection’ defence (ie indirect enforcement of a foreign revenue law), namely:

‘(i) that there exists an existing unsatisfied tax claim; (ii) that the proceeds of the litigation will go to the foreign revenue authority; and (iii) that the claim is in substance an attempt to collect foreign tax.’

The Cayman court held that the first and the second prerequisites were satisfied in that case. However, the Cayman court held that the third prerequisite was not satisfied, on the basis that the claim was proprietary in nature and the defendants were not taxpayers of the Norwegian government, and therefore this would justify the conclusion that the claim was not, in substance, an attempt to collect foreign tax.

Recorder Manzoni SC went on to make a number of important observations and findings in the Sochi Judgment:

‘… where the success of the claim being considered does not affect the amount of tax collected by the foreign state it does not amount to indirect enforcement.’


‘On the facts of this case, I am satisfied that the Russian budget will not be enriched by success or otherwise of the plaintiff’s claims against the defendant. The Russian tax laws have been written in such a way such that the Russian Federation does not need to look outside Russia for satisfaction of the taxes imposed. If a foreign entity is involved in any transaction where profits are made in Russia, the Russian Federation looks to the Russian entity involved in the transaction for satisfaction of the taxes. Whether the Russian entity is able to recover that money from the foreign entity is of no relevance to the Russian Federation.’


‘Further on the facts of this case it is clear that the tax has in fact been paid, and hence there is no unsatisfied tax claim. In the light of Humbert & Williams, I consider that the existence of an unsatisfied tax claim is an essential pre-requisite to the application of Rule 3. Although this case is not binding upon me it is highly persuasive and must be given due weight the Hong Kong courts.’


‘…where there is an unsatisfied debt and the factual circumstances justify a conclusion that the tax authorities are enforcing their own tax laws, the nature of the claim, and the identity of the claimant is immaterial. But if there is no unsatisfied debt, I fail to see how it can be said that the claim is an indirect enforcement of the foreign tax law. In its most simplistic form, all foreign tax law has already been enforced if there is no unsatisfied claim.’

Recorder Manzoni concluded that the plaintiff’s claim was not in the circumstances a claim seeking to enforce a foreign tax law and did not fall foul of the established rule.

Side note for liquidators

In the Sochi Judgment, Recorder Manzoni SC referred to and approved the principles in the judgments of Peter Buchanan and Wahr-Hansen.

In Peter Buchanan, a liquidator brought a claim in Ireland against a director of a Scottish company in liquidation for removing the company’s assets. The liquidator was chosen by the Scottish Revenue in an effort to ‘chase the tax’. The Irish court held that:

‘… if the payment of a revenue claim was only incidental and there had been other claims to be met, it would be difficult for our courts to refuse to lend assistance to bring assets of the company under the control of the liquidator. But there is no question of that here. … apart from costs and the expenses of the liquidator any moneys recovered will inevitably pass to the Revenue.’ (Our emphasis)

In Wahr-Hansen, the Cayman court referred to Peter Buchanan(8) and stated that:

‘… the only existing creditor was the revenue authority itself. It was advancing money to the liquidator to meet his expenses. The liquidator was required to consider only the interests of the revenue authority … This is the degree of control which has resulted in a liquidator, notwithstanding court supervision, being described as a 'nominee' or a 'puppet' of the Revenue.’ (Our emphasis)

These judgments suggest that if liquidators pursue claims in Hong Kong to recover assets to be distributed among the creditors of a company, which might include a foreign government with a claim for unpaid tax against the company, the Hong Kong court will not regard the claim by the liquidators as indirect enforcement of a foreign revenue law since the liquidators would be acting in the best interests of all creditors (and not solely for the foreign tax authority).

However, the position might be different if the only creditor is a foreign tax authority and the liquidators are pursuing a claim against a third party. The Hong Kong court may well regard this as indirect enforcement of a foreign revenue law since the liquidators would essentially be acting as nominee of the foreign tax authority, who would presumably receive the proceeds of the judgment after payment of the liquidation costs and expenses, in which case the claim may well be unenforceable in Hong Kong.