Prudential Assurance Company Ltd v Revenue and Customs Comrs [Ch D]

JurisdictionEngland & Wales
JudgeMr Justice Henderson
Judgment Date24 October 2013
Neutral Citation[2013] EWHC 3249 (Ch),[2010] EWHC 2811 (Ch)
Docket NumberCase No: HC03C01346
CourtChancery Division
Date24 October 2013
(1) The Prudential Assurance Company Limited and Others
The Commissioners for her Majesty's Revenue & Customs

[2010] EWHC 2811 (Ch)

Before: Mr Justice Henderson

Case No: HC03C01346




Mr Graham Aaronson QC and Mr David Cavender QC (instructed by Dorsey & Whitney (Europe) LLP) for the Claimants

Mr David Ewart QC, Mr Rupert Baldry QC and Mr Thomas Chacko (instructed by the Solicitor for HMRC) for the Defendants

Hearing dates: 18 and 19 November 2009, and 20 and 21 May 2010

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.


Mr Justice Henderson:



This is another in the series of test cases in which the United Kingdom's former rules on the taxation of dividends have been challenged as being contrary to the fundamental freedoms of establishment and free movement of capital previously contained in Articles 43 and 56 of the EC Treaty (now Articles 49 and 63 respectively of the Treaty on the Functioning of the European Union).


The present case is concerned with the UK's treatment of dividends received by UK-resident insurance companies on shareholdings which were held by them as investments and allocated to their pension business and life assurance business. The holdings in question were all of less than 10% (and usually of much less than 10%) of the shares of the relevant companies. In no instance was the shareholding of sufficient size to enable the owner of the shares to control or definitely influence the business of the company or the conduct of its affairs. For that reason, dividends of this type are conveniently referred to as “portfolio dividends”.


For the same reason, Article 43 (freedom of establishment) is no longer in issue, and the breaches of EU law that are now complained of are breaches of Article 56 only. The Court of Justice of the European Union (which I will continue to refer to by its commonly used English abbreviation as “the ECJ”) has held in a number of recent cases that the right of establishment of a person resident in a member state is engaged only where that person's shareholding in the capital of a company established in another member state gives him definite influence over the company's decisions and allows him to determine its activities: see, for example, Cadbury Schweppes Plc v IRC (Case C–196/04) [2006] ECR I-7995, [2007] Ch 30, (“ Cadbury Schweppes”) at paragraph 31 of the judgment, and Test Claimants in the Thin Cap Group Litigation v IRC ( Case C-524/04) [2007] ECR I-2107, [2007] STC 906, (“ Thin Cap”) at paragraph 27 of the judgment. Article 56, by contrast, is in principle capable of applying not only in respect of portfolio holdings in companies resident elsewhere in the EU and EEA, but also in respect of portfolio holdings in companies anywhere else in the world (“third countries”).


The first of the present test claimants, The Prudential Assurance Company Limited, issued its claim form in the Chancery Division of the High Court on 8 April 2003. By subsequent amendments made in 2004, two further companies in the Prudential Group, Prudential Holborn Life Limited and Scottish Amicable Life Plc, were added as further claimants.


On 30 July 2003 a group litigation order (“GLO”) was made by Chief Master Winegarten to constitute the “CFC and Dividend Group Litigation”. In broad terms, the common issues of law raised in this GLO concerned (a) the lawfulness of the UK provisions on dividend taxation, and (b) the lawfulness of the UK legislation on controlled foreign companies (“CFCs”). Apart from questions about the compatibility of the relevant legislation with EU law, the GLO raised numerous allied and consequential issues relating to such matters as procedure and jurisdiction (in what forum could or should the disputes be resolved?), limitation, quantum (how should compensation or relief be assessed?) and remedies.


The CFC issues may for present purposes be ignored. This is not because they are unimportant, but because the question of the compatibility of the UK's CFC legislation with EU law was considered by the ECJ in Cadbury Schweppes, although not as it happens in the context of the present GLO, but on a preliminary reference by the Special Commissioners on an appeal against a notice of liability served in accordance with that legislation. As I understand it, the relevant parts of the CFC GLO in the High Court are still in abeyance while the implications of the decision of the ECJ in Cadbury Schweppes are being worked out.


As to the compatibility of the UK dividend provisions with EU law, most of the relevant ground has in the event already been covered by other references to the ECJ in the Franked Investment Income (“FII”) and Thin Capitalisation (“Thin Cap”) Group Litigation. The latter of these references led on 13 March 2007 to the judgment of the ECJ in Thin Cap which I have already mentioned. The former led to its judgment, some three months earlier on 12 December 2006, in Test Claimants in the FII Group Litigation v IRC ( Case C-446/04) [2006] ECR I-11753, [2007] STC 326 (“ FII”). Yet further issues were referred in Class IV of the ACT Group Litigation, which led to the judgment of the ECJ, also on 12 December 2006, in Test Claimants in Class IV of the ACT Group Litigation v IRC ( Case C-374/04) [2006] ECR I-11673, [2007] STC 404 (“ ACT Class IV”).

The reference to the ECJ in the present case


Before any of those judgments had been given, an order for reference in the present group litigation was made by Park J on 18 March 2005. Leaving aside the questions relating specifically to the CFC legislation, the questions referred were as follows.


Question 1 asked whether it was contrary to Articles 43 or 56 EC for a member state to keep in force and apply measures which:

“(a) exempt from corporation tax dividends received by a company resident in that Member State (“the resident company”) from other resident companies; but which

(b) subject to corporation tax dividends received by the resident company from a company resident in another Member State and in particular a company controlled by it resident in another Member State and subject to a lower level of taxation there (“the controlled company”), after giving double taxation relief for any withholding tax payable on the dividend and for the underlying tax paid by the controlled company on its profits?”


Although asked with particular reference to controlled companies, this question also raised in general terms the issue whether it was lawful for a member state (here the UK) to exempt from corporation tax dividends received from a resident company (the relevant exemption was at all material times contained in section 208 of the Income and Corporation Taxes Act 1988 (“ ICTA 1988”)), but to subject to corporation tax dividends received from non-resident companies (under section 18 of ICTA 1988 and Case V of Schedule D). The question appears to have assumed that relief would be given against such tax not only for any withholding tax payable on the dividend, but also for the underlying tax paid by the non-resident company on the relevant part of its profits. However, this was an over-simplification, and the ECJ correctly dealt with the question on the footing that, where the holding was a portfolio holding of less than 10%, the only relief afforded by the UK legislation was for withholding tax paid on the dividend. No relief was given for any underlying corporation tax paid by the company making the distribution.


Question 2 asked whether Articles 43, 49 or 56 EC precluded national tax legislation such as that in issue in the main proceedings under which, before 1 July 1997:

“(a) certain dividends received by an insurance company resident in a Member State from a company resident in another Member State (“the non-resident company”) were chargeable to corporation tax; but

(b) the resident insurance company was allowed to elect that corresponding dividends received from a company resident in the same Member State should not be chargeable to corporation tax, with the further consequence that a company which had made the election was unable to claim payment of the tax credit to which it would otherwise have been entitled?”


Translated into UK terms, this question was concerned with the validity of the right of election contained in section 438(6) of ICTA 1988. I will not at this stage attempt to explain the nature of the right, beyond noting that it applied in the computation of the profits of pension business carried on by an insurance company, and enabled the company to elect to exclude FII from the computation, and thus to reduce the pension business profits chargeable to corporation tax, at the price of foregoing the tax credits that the company would otherwise have been entitled to claim and have paid to it if the FII were included in the computation. In all normal circumstances, it was advantageous to the company to make such an election, because the rate of corporation tax thereby avoided was higher than the rate of tax reflected in the tax credits foregone. However, by virtue of its confinement to FII, which was a product of the UK's partial imputation system of dividend taxation and did not apply to foreign dividends, the election could not be made in respect of foreign dividend income, whether from the EU or third countries. Section 438(6) was repealed by the Finance (No. 2) Act 1997, which received the Royal Assent on 31 July 1997, in relation to accounting periods beginning on or after 2 July 1997.


Question 4...

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