General Reinsurance Company Ltd v Tomlinson (HM Inspector of Taxes)
| Jurisdiction | England & Wales |
| Judgment Date | 27 January 1970 |
| Date | 27 January 1970 |
| Court | Chancery Division |
HIGH COURT OF JUSTICE (CHANCERY DIVISION)-
Income tax, Schedule D-Transactions between associated dealing and non-dealing companies-Profits of non-dealing company on sale of assets acquired from dealer's trading stock-Income Tax Act 1952 (15 & 16 Geo. 6 & 1 Eliz. 2, c. 10), s. 143(4)(a); Finance Act 1960 (8 & 9 Geo. 6, c. 44), ss. 25(1) and 43.
The Appellant Company in the first case carried on reinsurance business. It was resident in the Netherlands and traded in the United Kingdom through a branch in London. As much of the administration as was practicable was carried out at the head office in Amsterdam. The Company needed substantial reserves in order to meet possible claims and attract business. Money received was either banked or invested. Claims were normally met from current or deposit bank accounts, and sales of investments were mainly effected to improve the portfolio. The London branch had a portfolio of investments, which was regarded by the directors as part of the overall portfolio; decisions to purchase or sell investments were taken in Amsterdam. The London portfolio was built up from the profits of the activities of the London branch, including business with American insurers, sterling received in London being invested in sterling securities and dollar receipts in dollar securities. The dollar investments were held by a bank in New York in a trust fund set up, in compliance with local law and practice, as security for the Company's obligations in the United States. If that fund had been reduced it would have been necessary immediately to restore it; consequently no payments were normally made out of it, claims being met from other resources.
The Double Taxation Convention in force at the material time between the United Kingdom and the Netherlands restricted the United Kingdom tax chargeable on the industrial or commercial profits of a Netherlands enterprise trading through a permanent establishment in the United Kingdom to tax on the profits attributable
to that establishment, viz., the industrial or commercial profits which it might be expected to derive in the United Kingdom if it were an independent enterprise engaged in similar activities under similar conditions and dealing at arm's length with the Netherlands enterprise in questionThe Company was assessed to income tax under Case I of Schedule D for the year 1960-61 in respect of the profits of the trade of reinsurance carried on by it in the United Kingdom, including profits on the realisation of investments in the London portfolio and dividends, etc., on those investments. On appeal, the Company contended (a) that its trading activities in London were confined to underwriting, and surpluses on the realisation of investments arising from those activities arose on capital account; alternatively, (b) that the New York trust fund was earmarked as a permanent capital asset and surpluses from the investments comprised in that fund ought to be treated as capital; alternatively, (c) that since the Company's investment activities were controlled from Amsterdam they were not activities of the London branch, so that surpluses on realisation should be excluded from the computation under the Double Taxation Convention; alternatively, (d) that income from and profits on the realisation of investments in the New York trust fund should be so excluded as being profits derived outside and not in the United Kingdom. The Special Commissioners held (1) that surpluses on realisation of investments of funds arising from the Company's underwriting activities in London, including investments in the New York trust fund, should be included as trading receipts; (2) that since the investments in question, including those outside the United Kingdom, were made, as an indispensable adjunct to the underwriting activities of the London branch, out of the earnings of those activities, the above-mentioned trading receipts and the income from the dollar investments would be attributable to that branch on the footing that it was an independent enterprise, and were therefore not excluded by the Double Taxation Convention from the profits attributable to the branch.
A Ltd., the Appellant in the second case, was an investment-holding company formed in June 1960 as a wholly-owned subsidiary of the Appellant in the first case. It was not a dealing company. Certain securities in the parent company's London portfolio were transferred to A Ltd. at market value in consideration of the allotment of shares in A Ltd. and were subsequently sold by A Ltd. at a profit. A Ltd. was assessed by virtue of s. 25, Finance Act 1960, to income tax under Case VI of Schedule D for the year 1960-61 in respect of surpluses so realised, on the footing that at the time of their transfer to A Ltd. the securities had been trading stock of a dealing company associated with A Ltd. On appeal, the Special Commissioners confirmed the assessment following their decision in the first case.
Held, that the Commissioners' decisions were correct.
(1) General Reinsurance Co. Ltd. v. Tomlinson (H.M. Inspector of Taxes)
CASE
Stated under the Income Tax Act 1952, s. 64, by the Commissioners for the Special Purposes of the Income Tax Acts for the opinion of the Income Tax Acts for the opinion of the High Court of Justice.
1. At a meeting of the Commissioners for the Special Purposes of the Income Tax Acts held on 23rd, 24th, 25th, 26th, 27th and 30th January 1967, General Reinsurance Co. Ltd. (hereinafter called "the Appellant") appealed against an assessment to income tax under Schedule D, Income Tax Act 1952, in the sum of £150,000 in respect of the profits of the trade of an insurance company for the year 1960-61.
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(2) The following documents were produced before us and admitted or proved:
(i) Translation of the articles of association of the Appellant.
(ii) Power of attorney dated 24th September 1955, given by the Appellant to General Reinsurance Syndicate Ltd. (exhibit A).
(iii) Copies of forms completed on behalf of the Appellant and delivered to the Registrar of Companies.
(iv) Consolidated accounts of the Algemeene group of reinsurance companies for 1959-60 (exhibit B).
(v) Annual report and accounts of the Appellant for 1959-60 (exhibit C).
(vi) Annual report and accounts of the London branch of the Appellant in respect of the year to 30th June 1960 (exhibit D).
(vii) Trust deeds relating to United States trust fund (exhibit E (i), (ii) and (iii)).
(viii) Return made by the Appellant pursuant to S.I. 1958 No. 1765 (exhibit F).
(3) The documents referred to in (i) and (iii) are not exhibited to this Case but are available for the use of the High Court. The remaining documents are exhibited to and form part of this Case(1).
Evidence was given by Mr. B. Monic, a director and manager of the Appellant and managing director of General Reinsurance Syndicate Ltd. (hereinafter called "Syndicate"); Mr. E.J. Slager, who worked at the Appellant's head office in Amsterdam and was responsible for the administration of the Appellant's financial management matters and investments; and Mr. J. Strauss, a stockbroker and partner of Strauss, Turnbull & Co., London, who had advised the Appellant for some 15 years.
3. Stated shortly, the questions for our determination were as follows:
(2) whether profits on realisations of investments representing funds arising from underwriting activities in London of the Appellant's branch should be included in the computation of its profits for the purposes of Case I of Schedule D of the Income Tax Act 1952;
(3) whether profits on the above-mentioned realisations of investments, and dividends and interest arising from dollar investments, should be excluded from the computation for Case I purposes under the provisions of the Double Taxation Relief (Taxes on Income) (Netherlands) Order 1950 (S.I. 1950 No. 1196) (hereinafter called "the Double Taxation Order");
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(4) whether deduction of interest payable by the Appellant in respect of premiums and reserves retained by it under contracts of reinsurance was
prohibited by s. 137(1), Income Tax Act 1952, in computing the Appellant's profits for Case I purposes.
We determined question (3) in favour of the Appellant, and dissatisfaction with such determination pursuant to s. 64(1), Income Tax Act 1952, not having been declared to us on behalf of the Inspector of Taxes, we have omitted from this Case the documents produced to us and the facts found by us in relation to this question.
4. The following facts were proved or admitted:
(2) The Appellant carries on business in Amsterdam, where its head office is situated; it has overseas subsidiaries and a branch in London. It is agreed between the parties that this branch is "a permanent establishment" within the meaning of Article II (1) (k) of the Convention specified in the Double Taxation Order.
(3) It is also common ground that for income tax purposes the Appellant is resident in the Netherlands and not resident in the United Kingdom.
(4) The name of the Appellant is Algemeene Herverzekering Maatschappij N.V., and its constitution provides for the use of the English name, General Reinsurance Co. Ltd., where it is convenient to do so.
(5) The Appellant's trade is that of reinsurance, that is, part of the risks carried by insurers is passed to ("ceded to") and accepted by the Appellant, which in turn may pass on ("retrocede") part of that risk to other reinsurers, known as "retrocessionaires" (who in turn may retrocede part of their obligations). The retrocessionaire normally assumes liability on the same terms as did the reinsurer.
(6) Each reinsurance transaction, or "cession" as it is called, gives rise to a separate contract binding only on the parties to it. Reinsurance is of two kinds: (a) treaty reinsurance: this is reinsurance...
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