Memec Plc v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 09 June 1998 |
| Date | 09 June 1998 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Peter Gibson and Henry LJJ and Sir Christopher Staughton.
Robert Venables QC, Julian Ghosh and Amanda Hardy (instructed by Finers) for the taxpayer.
Launcelot Henderson QC (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Archer-Shee v Garland (HMIT)TAX (1929) 15 TC 693
Baker (HMIT) v Archer-SheeELR [1927] AC 844
Carson (HMIT) v Cheyney's ExecutorELR [1959] AC 412
Drummond v CollinsELR [1915] AC 1011
Esso Petroleum Co Ltd v Minister of Defence TAXELR[1989] BTC 500; [1990] Ch 163
IR Commrs v Commerzbank AG TAXTAX[1990] BTC 172; 63 TC 218
MacKinlay (HMIT) v Arthur Young McClelland Moores & CoTAXELR[1989] BTC 587; [1990] 2 AC 239
Padmore v IR Commrs TAXTAX[1989] BTC 221 (CA); 62 TC 352
Stainer's Executors v Purchase (HMIT)ELR [1952] AC 280
Corporation tax - Double taxation relief - UK company received share of profits under "silent partnership" agreement under German law - Whether share of profits was a "dividend" - Whether company entitled to tax credit for German trade tax paid by German subsidiaries -Income and Corporation Taxes Act 1988 section 801 subsec-or-para (1)Income and Corporation Taxes Act 1988, s. 801(1) - Double Taxation Relief (Taxes on Income) (German Federal Republic) Order 1964 (SI 1967/25), art. 18(1), 6(4) (as amended by the Protocol of 23 March 1970).
This was an appeal by the taxpayer ("Plc") against a judgment of Robert Walker J ([1996] BTC 590) that Plc was not entitled to credit for German trade tax paid by subsidiaries of its German subsidiary ("GmbH") on payment to Plc by GmbH of its share of GmbH's profits of a "silent partnership" set up under German law.
Plc was a UK company which indirectly owned through UK subsidiaries all the issued share capital of GmbH, a German company. GmbH owned two trading subsidiaries which paid German trade tax on profits paid to GmbH. GmbH's business was that of holding shares in its trading subsidiaries as an investment.
In 1985, in order to reduce GmbH's German tax liability, Plc and GmbH entered into a "silent partnership" agreement under which Plc, as the silent partner, received a share in GmbH's profits.
Under German law a silent partner made a capital contribution to a commercial enterprise run by another, referred to as "the owner". The silent partner was entitled to receive from the owner a share of the income of the business calculated annually. The silent partner had no proprietary interest in the assets of the business and to an outsider, the silent partner's identity might not be revealed.
The High Court held that Plc was not entitled to credit for the German trade tax paid by the trading subsidiaries under art. 18 of the Double Taxation Relief (Taxes on Income) (German Federal Republic) Order 1964 (SI 1967/25) ("the Convention").
Plc contended that the share of profits received by Plc were either conventional dividends paid by the subsidiaries and received as profits of the silent partnership (the transparency argument), or that Plc's share of the profits of the silent partnership was paid by GmbH to Plc as a dividend.
Held, dismissing the taxpayer's appeal:
1. If the terms of a silent partnership had been equivalent to a partnership in English law (or even Scottish law), the dividends paid by GmbH to Plc would have been regarded as paid by the subsidiaries to Plc because under English and Scottish law income paid to the firm would be income paid to the partners. But a silent partner under German law was in the position of a purchaser who, for a consideration consisting of the contribution of a capital sum and an undertaking to contribute to losses of the owner of the business up to the amount of the contribution, purchased the right to income calculated as a share of the annual profits of the business. On that basis, the intervention of GmbH could not be ignored to regard the subsidiaries as having paid dividends to Plc.
2. Per Peter Gibson LJ: the definition in art. 6(4) of the double taxation agreement, was not imported into art. 18. Plc's share of profits could not be regarded as a "dividend". But even if "dividends" had the same meaning as the definition in art. 6(4), that would not cover a share of profits paid to a silent partner. It would still be necessary to establish that the trade tax paid by the subsidiaries was deemed by the Income and Corporation Taxes Act 1988 section 801 subsec-or-para (2)Income and Corporation Taxes Act 1988, s. 801(2) to have been paid by GmbH.
3. In the absence of a definition of a "dividend" in art. 18, art. 2(3) indicated that UK law was to determine its meaning. Unless a dividend in its ordinary meaning in UK law had been paid,Income and Corporation Taxes Act 1988 section 801s. 801 of the 1988 Act, dealing with double taxation relief for dividends paid between related companies, would not apply. The payment of profits under a silent partnership could not be brought within the ordinary meaning of a dividend in UK law. Plc's share of the profits of GmbH could not be regarded as a dividend when that payment was unrelated to shares in GmbH and the partnership was not a company.
4. Per Sir Christopher Staughton: The word "dividend" in art. 18 was to be given the same meaning as its definition in art. 6(4), which included income received by a sleeping partner. However it was still necessary to rely on the 1988 Act under which distributions made to a "silent partner" could not be regarded as dividends.
Peter Gibson LJ: The taxpayer, Memec plc ("Plc"), claimed relief from corporation tax in the accounting periods ended 31 December 1986, 1987 and 1988 respectively in respect of trade tax (Gewerbesteuer) levied in Germany on the profits of two German companies, which profits were the ultimate source of certain income received by Plc in those accounting periods. The claims were made pursuant to a double taxation convention of 28 November 1964 with Germany, as amended by a protocol of 23 March 1970, alternatively pursuant to Income and Corporation Taxes Act 1988 part XVIIIPt. XVIII of the Income and Corporation Taxes Act 1970, ("the 1970 Act") and/or Income and Corporation Taxes Act 1988 part XVIIIPt. XVIII of theIncome and Corporation Taxes Act 1988 ("the 1988 Act"), and in the further alternative pursuant partly to the convention and partly to Pt. XVIII of the 1970 Act and/or Pt. XVIII of the 1988 Act. The Revenue refused those claims and on appeal by Plc a special commissioner dismissed the appeals. On an appeal by Plc from the special commissioner by way of case stated, Robert Walker J on 24 October 1996 dismissed the appeal. Plc now appeals to this court.
The judge's full and careful judgment is now reported together with the decision of the special commissioner ([1996] BTC 590) and I can confine my recitation of the facts and of the fiscal provisions in point to the salient facts and the more important provisions, looking only, for convenience, at the 1988 Act, which re-enacts provisions found in the 1970 Act, and at the convention.
Plc is an English company resident in England. It owns directly or indirectly the whole of the issued share capital of Memec GmbH ("GmbH"), a German holding company resident in Germany. GmbH owns the whole of the issued share capital of each of two subsidiary companies ("the subsidiaries"), each of which is a German trading company resident in Germany. For every DM100 of profits each of the subsidiaries paid approximately DM20 trade tax, which is a local tax, and in addition German corporation tax (Körperschaftsteuer), which is a Federal tax, at the rate of 36 per cent on the profits net of trade tax. On paying a dividend to GmbH, the subsidiaries were obliged to deduct and account for dividend withholding tax at the rate of 25 per cent of the gross dividend. GmbH had no further liability to trade tax on its dividend income and its profits for German corporation tax purposes consisted of the dividends received from the subsidiaries grossed up to take account of the German corporation tax borne, and the dividend withholding tax paid, by the subsidiaries. When GmbH paid a dividend to Plc, that was subject to withholding tax at the rate of 15 per cent allowed under the convention. The net result was that only 43.52 per cent of the subsidiaries' pre-tax profits, assuming maximum distribution by the subsidiaries to GmbH and by GmbH to Plc, was received by Plc.
It was with the primary intention of reducing the burden of German tax that Plc and GmbH on 14 February 1985 entered into an agreement ("the agreement") for a silent partnership (stille gesellschaft). Such a partnership is one formed under s. 230 ff. of the German Commercial Code and its characteristics were summarised by the judge (at p. 596) as follows:
The essential points are that the silent partner (stille gesellschafter) makes a capital contribution to a commercial enterprise run by another person who is designated as the owner (inhaber). The owner remains the owner of the business assets, and of the income from those assets as it accrues. The silent partner has no proprietary interest in the assets but has a contractual right to payment of his share of the annual profits (if any) as shown by the partnership accounts, and can sue for damages in the event of any misappropriation. The owner runs the business, though the silent partner has access to information about it. The silent partner is not responsible for liabilities of the partnership beyond the amount of his contribution, but his share of any loss will be debited to his contribution, and must be made good out of his share of profits of later years before any share of profits is distributed to him. On termination of the partnership the silent partner gets a return of his capital contribution, so far as it has not been lost. A silent partnership has no separate legal...
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