Memec Plc v Commissioners of Inland Revenue
| Jurisdiction | England & Wales |
| Judgment Date | 24 October 1996 |
| Date | 24 October 1996 |
| Court | Chancery Division |
Chancery Division.
Robert Walker J.
Robert Venables QC and Robert Grierson (instructed by Finers) for Memec plc.
Launcelot Henderson QC (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Baker (HMIT) v Archer-Shee ELRELR[1927] 1 KB 109 (CA); [1927] AC 844 (HL)
Carson (HMIT) v Cheyney's Executor TAX(1958) 38 TC 240
Esso Petroleum Co Ltd v Ministry of Defence ELRTAX[1990] Ch 163; [1989] BTC 500
Garland (HMIT) v Archer-Shee TAX(1929) 15 TC 693
Archer-Shee v Garland (HMIT) ELR[1931] AC 212
IR Commrs v Commerzbank AG TAXTAXTAX(1990 63 TC 218) 63 TC 218; [1990] BTC 172
Leeming v Jones (HMIT) TAX(1929) 15 TC 333
MacKinlay (HMIT) v Arthur Young McClelland Moores & CoTAXTAX(1989) 62 TC 704; [1989] BTC 587
Padmore v IR Commrs TAXTAXTAX(1989) 62 TC 352; [1987] BTC 3 (ChD); [1989] BTC 221 (CA)
Rae (HMIT) v Lazard Investment Trust Co Ltd TAX(1963) 41 TC 1
Reed (HMIT) v Young TAXTAX(1986) 59 TC 196; [1986] BTC 242
Stainer's Executors v Purchase (HMIT) ELR[1952] AC 280
Sun Life Assurance Co of Canada v Pearson (HMIT) TAXTAX(1986) 59 TC 250; [1986] BTC 282
Corporation tax - Tax credit - UK company received share of profits under German "silent partnership" agreement - Whether a dividend - Whether company entitled to tax credit for German trade tax -Income and Corporation Taxes Act 1988 part XVIIIIncome and Corporation Taxes Act 1988, Pt. XVIII - 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 a UK company ("PLC") from the decision of a special commissioner that it was not entitled to credit for German "trade tax" under the double taxation agreement between the UK and the Federal Republic of Germany ("the convention") or under UK legislation.
PLC was a UK incorporated and resident company which indirectly owned through UK subsidiaries all the issued share capital of Memec GmbH ("GmbH"), a German incorporated and resident company. GmbH owned two German subsidiaries ("the trading subsidiaries") which paid German trade tax on profits paid to GmbH.
In 1985 PLC and GmbH entered into a "silent partnership" agreement (stille gesellschaft) ("the agreement") under which PLC received a direct share in GmbH's profits.
Under German law the silent partner in a silent partnership made a capital contribution to a commercial enterprise run by another, referred to as the "owner". The owner would run the business and the silent partner was entitled to receive from the owner a share of the income of the business. The silent partner had no proprietary interest in the assets and to the outsider, the identity of the silent partner would not be revealed. Under the agreement GmbH was the "general" or "managing" partner and PLC was the "silent" or "limited" partner. It was accepted that the business of GmbH was that of holding the shares in its trading subsidiaries as an investment.
The question of law raised in the appeal was whether PLC was entitled, under the Convention or under domestic law or both, to credit in respect of German trade tax suffered by the trading subsidiaries on profits which were paid to GmbH and in which profits PLC took a share under the silent partnership agreement.
There were three main issues. The first issue was whether the silent partnership was transparent in the sense that dividends paid by the trading subsidiaries were paid to PLC. If so, credit would be allowed under art. 18 of the Convention.
The second issue and third issues were in the alternative. The second issue was whether the word "dividend" in art. 18 of the Convention should be interpreted in accordance with the wide definition (including a silent partner's income) in art. 6(4)although that definition was not expressly made applicable to art. 18. The second issue by itself would not succeed, since the trade tax was not paid by GmbH.
The third issue was as to the meaning of "dividend" in Income and Corporation Taxes Act 1988 part XVIIIPt. XVIII of the 1988 Act. Part of the third issue was a claim for credit by a combination of treaty relief under art. 18(1) and unilateral relief underIncome and Corporation Taxes Act 1988 section 801s. 801. The other part of the third issue raised a comparable question as to the meaning of "dividend" in Income and Corporation Taxes Act 1988 section 801s. 801.
Held, dismissing PLC's appeal:
1. Since PLC had no proprietary right in the shares of the trading subsidiaries, or in the dividends accruing on those shares, the silent partnership between GmbH and PLC was not transparent for UK tax purposes, and the source of PLC's taxable income was not the dividends of the trading subsidiaries. The dividends belonged to GmbH as the subsidiaries' holding company, and the contractual arrangement under which a share of the dividends was due to PLC had to be regarded as a separate source of income. PLC did not receive, or become entitled to, dividends paid by the trading subsidiaries, and thus did not achieve the direct route to treaty relief by way of credit for trade tax paid by the trading subsidiaries through Income and Corporation Taxes Act 1988 section 788s. 788 and art. 18(1)(a) and (b) of the Convention.
2. The word "dividend" in art. 18(1) of the Convention had the same wide meaning as in art. 6(4). In the simple case of a dividend paid by a German trading company to a shareholder resident in the UK, art. 18(1)(a) gave a credit for 15 per cent withholding tax permitted by art. 6(1), but denied a credit for underlying tax suffered by the German company. However, art. 18(1)(b)allowed credit for underlying tax if the recipient shareholder was a company controlling 25 per cent of the votes in the German company. That credit would extend to trade tax suffered by the German company itself, but not to trade tax suffered by a German subsidiary of the German company paying the dividend. For that purpose the language ofIncome and Corporation Taxes Act 1988 section 801 subsec-or-para (1) section 801 subsec-or-para (2)ss. 801(1) and (2) of the 1988 Act might have been relied on. But, more decisively, construing the Convention in as symmetrical a way as the language allowed in view of the variations in national tax systems, the distributive provisions of art. 6 and the relieving provisions of art. 18 should include a distribution of silent partnership profits in cases meeting the other conditions in art. 18(1)(b).PLC succeeded, therefore, on the second main issue.
3. The expression "dividend" in Income and Corporation Taxes Act 1988 part XVIIIPt. XVIII of the 1988 Act was narrower than the meaning of the word in the Convention and could not include a distribution of profits made by a silent partnership. There was no special definition of "dividend" in Income and Corporation Taxes Act 1988 part XVIIIPt. XVIII if the 1988 Act, butIncome and Corporation Taxes Act 1988 section 801 subsec-or-para (1) section 801 subsec-or-para (2)s. 801(1) and (2) (as well as Income and Corporation Taxes Act 1988 section 790 subsec-or-para (6)s. 790(6) dealing with unilateral relief) was expressly concerned with a dividend paid by one company to another. "Company" as used in the Income and Corporation Taxes Act 19881988 Act did not, in general, include a partnership and the ordinary meaning of a dividend was the commonest form of distributions made by companies.
1. On 24, 25 and 26 November 1993 a commissioner for the special purposes of the Income Tax Acts (Mr THK Everett), heard the appeals of Memec plc ("PLC") against the refusal by the Revenue of alternative claims by PLC pursuant to theIncome and Corporation Taxes Act 1970 part XVIIIIncome and Corporation Taxes Act 1970 Pt. XVIII and theIncome and Corporation Taxes Act 1988 part XVIIIIncome and Corporation Taxes Act 1988 Pt. XVIII, for relief from corporation tax in the accounting periods ending 31 December 1986, 1987, and 1988, by virtue of trade tax (the Gewerbesteuer) levied in the Federal Republic of Germany on the profits of Metronik Vertrieb Efektronischer Bauelmente GmbH and IST Sales & Trading GmbH (now IST Elektronik Vertriebs GmbH) ("the subsidiaries") in which at all material times PLC has had a 100 per cent indirect interest.
2. Shortly stated the question for decision was whether PLC was entitled to credit in respect of trade tax suffered by the subsidiaries on profits which were paid by them to their German parent company, Memec GmbH ("GmbH") and in whose profits PLC took a share by virtue of a silent partnership agreement.
[Paragraphs 3 and 4 stated that the commissioner heard no oral evidence and listed the documents proved or admitted before him.]
5. Findings of fact on the evidence adduced together with the commissioner's conclusions in principle are set out in the written decision which was issued on 27 January 1994.
6. Figures were not been agreed between the parties, PLC having declared its dissatisfaction with the decision and having requested a case to be stated for the opinion of the High Court in principle pursuant to theTaxes Management Act 1970 section 56Taxes Management Act 1970 s. 56.
7. The delay in issue of the case was occasioned by the failure of the parties to agree until January 1996 a formulation of the question of law for the opinion of the High Court.
8. The agreed question of law for the opinion of the High Court was as follows:
Whether PLC is entitled, whether under the Convention of 26 November 1964 between the UK and Germany or otherwise under domestic law or both, to credit in respect of trade tax suffered by the subsidiaries on profits which were paid by them to GmbH and in whose profits PLC took a share under the silent partnership agreement.
This appeal is against the refusal by the Revenue of alternative claims by Memec plc ("PLC") pursuant to the...
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