Commissioners of Inland Revenue v Oce Van Der Grinten NV (C-58/01)
| Jurisdiction | England & Wales |
| Judgment Date | 25 September 2003 |
| Date | 25 September 2003 |
| Court | Special Commissioners (UK) |
special commissioners decision
STEPHEN OLIVER Q.C. (SPECIAL COMMISSIONER)
1. Oce Van Der Grinten ("Oce NV") appeals against the refusal by the Board of Inland Revenue in a letter dated 26 April 1995 of Oce NV's claim for payment of an amount which Oce NV say should have been paid as tax credit under article 10.3(c) of the UK-Netherlands Double Taxation Convention, (1981) Cmnd 8268, ("the Treaty"). The point at issue is whether, as Oce NV argue, the Inland Revenue's claim to restrict their repayment of the tax credit due to Oce NV, by 5% of the aggregate of the amount of two dividends received from its UK subsidiary, Oce UK Ltd ("Oce UK") and the amount of the tax credits on those dividends, violates their enforceable Community rights.
2. The Inland Revenue say that their refusal is based on the proper application of article 10.3(a)(ii) and (c) of the Treaty. Oce NV relies on article 5.1 of Council Directive 435 of 1990 ("the Directive"). That article, they say, has the effect of exempting them from the 5% restriction on the grounds that the restriction ranks as a "withholding tax" in article 5.1; and article 5.1 is not, they argue, disapplied by article 7.2. The Directive which is expressed to be "on the common system of taxation applicable in the case of parent companies and subsidiaries of different Member States contains a Recital in the following words-
Whereas it is furthermore necessary, in order to ensure fiscal neutrality, that the profits which a subsidiary distributes to its parent company be exempt from withholding tax;…
Article 1 provides that "each Member State shall apply this Directive:… - to distributions of profits by companies of that State to companies of other Member States of which they are subsidiaries."
Article 5 provides -
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1. Profits which a subsidiary distributes to its parent company shall, at least where the latter holds a minimum of 25% of the capital of the subsidiary, be exempt from withholding tax.
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2.-4…
Article 6 provides -
The Member State of a parent company may not charge withholding tax on the profits which such a company receives from the subsidiary.
Article 7 provides -
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1. The term "withholding tax" as used in this Directive shall not cover an advance payment or pre-payment (precompte) of corporation tax to the Member State of the subsidiary which is made in connection with a distribution of profits to its parent company.
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2. This Directive shall not affect the application of domestic or agreement-based provisions designed to eliminate or lessen economic double taxation of dividends, in particular provisions relating to the payment of tax credits to the recipients of dividends.
3. The tax system in force at the time relevant to the present claims required companies resident in the United Kingdom paying dividends to their shareholders (wherever resident) to make a payment to the Inland Revenue, calculated by reference to the amount of the dividends, by way of advance corporation tax (ACT); Income and Corporation Taxes Act 1988 section 14see Income and Corporation Taxes Act 1988 section 14. The amount of such payment could subsequently be set off against the paying company's general liability for corporation tax:Income and Corporation Taxes Act 1988 section 239section 239. The system is now changed but those changes do not affect the present claims and the law as stated is that in force at the time relevant to the present claims: Finance Act 1998 section 31section 31 of Finance Act 1998 abolished ACT with effect from 1 April 1999. The corollary of that system was for a tax credit (representing part of the tax payable by the company) to be given to a United Kingdom resident shareholder: Income and Corporation Taxes Act 1988 section 231 subsec-or-para (1)section 231(1) and (3). That shareholder would be taxed on the basis that he had received distributions of an amount equal to the value of the distribution plus the value of the tax credit: Income and Corporation Taxes Act 1988 section 20section 20. A similar credit was also given to a United Kingdom resident corporate shareholder to offset against its own liability for ACT on distributions that it might make: Income and Corporation Taxes Act 1988 section 231 subsec-or-para (1) section 238 subsec-or-para (1) section 241 subsec-or-para (1)sections 231(1), 238(1) and 241(1). But neither of those benefits was available to a non-resident shareholder such as Oce NV under domestic law.
4. A number of Double Taxation Agreements between the United Kingdom and other countries provide for a measure of relief. Article 10 of the present Treaty provides that where a United Kingdom resident company has paid a dividend to a corporate shareholder resident in the Netherlands holding 10% or more of the shares in the paying company, that shareholder is to be "entitled to a tax credit equal to one-half of the tax credit to which an individual resident in the United Kingdom would have been entitled" (article 10.3(c)); article 10.3(a)(ii) directs, however, that -
…tax may also be charged in the United Kingdom and according to the laws of the United Kingdom on the aggregate of the amount or value of that dividend and the amount of that tax credit at a rate not exceeding 5%.
5. Article 10 of the Treaty is made part of the United Kingdom tax code without further action by Income and Corporation Taxes Act 1988 section 788 subsec-or-para (3)section 788(3) which provides that such treaty arrangements "shall have effect in relation to income tax and corporation tax insofar as they provide… for conferring on persons not resident in the United Kingdom the right to a tax credit under section 231 in respect of qualifying distributions made to them by companies which are so resident." The effect of the arrangements embodied in article 10 of the Treaty is that where a United Kingdom resident subsidiary pays a dividend to a Netherlands resident parent company the subsidiary pays ACT in the ordinary way and offsets it against its mainstream corporation tax liability; but under article 10 the parent is entitled, as a matter of UK tax law, to a tax credit of the amounts specified in paragraph 3.
6. In the present case the procedure provided for in the DTR (Taxes on Income) (General) (Dividend) Regulations 1973 (SI 1973 No. 317) ("the General Regulations") has been adopted. Instead of Oce NV receiving the dividend and then claiming the tax credit from the Inland Revenue (i.e. half the tax credit to which a United Kingdom resident individual would have been entitled less 5% of the aggregate of the amount of the dividend and the amount of the tax credit), the General Regulations allow Oce UK to pay over to Oce NV the dividend plus the tax credit less the 5%. Oce UK is then able to set the amounts so paid against its own mainstream corporation tax liability. This was authorised by letter from the Inspector of Foreign Dividends of 24 November 1989 to Oce UK.
7. On 30 November 1992 and on 5 April 1993, Oce UK paid dividends to Oce NV, adding (under the terms of these arrangements) an amount representing the tax credit less the 5% deduction. The sums paid and deducted were as follows (£):
8. Oce NV appealed against the imposition of the 5% deduction claiming repayment of the sums deducted. Oce NV's case is based on what they say is the proper application of the Directive.
9. The first issue is whether the 5% referred to in article 10.3(a)(ii) is a "withholding tax" on "profits that a subsidiary distributes to its parent". If it is, the second issue is whether the United Kingdom Inland Revenue's right to require the deduction is nonetheless preserved by article 7.2 of the Directive. This only arises if the deduction is a withholding tax on profits that a subsidiary distributes in the first place. The third issue, which assumes that article 7.2 preserves the 5% from the effect of article 5.1, is whether article 7.2 is valid.
10. Oce NV contend that the 5%, being a tax deducted at source, is a withholding tax on the distributed profits. It is a tax charged under the Income and Corporation Taxes Act 1988Schedule F charging provisions of section 20, i.e. a tax "chargeable… in respect of all dividends and other distributions… of a company registered in the United Kingdom"; by reason of article 10.3(a)(ii) the 5% is a "tax… charged… on the aggregate of the amount or value of that dividend and the amount of the tax credit".
11. The Inland Revenue contend that the 5% is not a withholding tax on "profits which a subsidiary company distributed to its parent company". The amount of the distribution may affect the calculation of the 5% under article 10(3)(a)(ii) but that amount is not affected by the charge. This is because a tax credit granted to a parent company is neither part of the profits of the subsidiary company nor is it distributed by a subsidiary company. The 5% is deducted from the credit payable to the parent. The subsidiary is not in any event chargeable to United Kingdom tax on the distribution and the amount of the dividend is not reduced or affected by the 5% reduction.
12. The operation of article 5.1 depends on three related issues. The first, a matter of United Kingdom law, is whether the 5% is a tax. The second, also a matter of United Kingdom law, is whether the 5% ranks as a tax on profits which a subsidiary such as Oce UK distributes to its Netherlands parent (such as Oce NV). The third, which arises if it is a tax on such profits, is essentially a matter of Community law and is whether the 5% is a withholding tax.
13. In the absence of article...
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