Steele v E.v.C. International N.v (formerly European Vinyls Corporation (Holdings) B.v)
| Jurisdiction | England & Wales |
| Judgment Date | 08 May 1996 |
| Date | 08 May 1996 |
| Court | Court of Appeal (Civil Division) |
Court of Appeal (Civil Division).
Neill, Morritt and Hutchison L JJ.
Robert Vanables QC and Robert Grierson (instructed by Allen & Overy) for EVC.
Launcelot Henderson QC (instructed by the Solicitor of Inland Revenue) for the Crown.
The following cases were referred to in the judgment:
Barclays Bank Ltd v IR Commrs ELR[1961] AC 509
Bibby (J) & Sons Ltd v IR Commrs TAX(1945) 29 TC 167
British American Tobacco Co Ltd v IR Commrs TAX(1942) 29 TC 49
IR Commrs v Commerzbank AG TAX[1990] BTC 172
IR Commrs v Lithgows Ltd TAX(1960) 39 TC 270
Irving (HMIT) v Tesco Stores (Holdings) Ltd TAXTAX(1982) 58 TC 1; [1982] BTC 305
Noble (BW) Ltd v IR Commrs TAX(1926) 12 TC 911
Corporation tax - Double taxation agreement - Netherlands company set up as joint venture between UK and Italian company - Agreement whereby neither party could act without consent of the other - Dividends paid by UK subsidiary to Netherlands company - Claim for tax credit - Credit not allowed if company controlled by two or more connected persons - Whether the two shareholders of the Netherlands company were connected with each other - Whether acting together to secure or exercise control -Income and Corporation Taxes Act 1988 section 416 subsec-or-para (2) section 839 subsec-or-para (7)Income and Corporation Taxes Act 1988, ss. 416(2), 839(7); Double Taxation Relief (Taxes on Income) (Netherlands) Order 1980 (SI 1980/1961), art. 10(3)(d).
This was an appeal by the taxpayer ("EVC") against a decision of Lightman J ([1995] BTC 32) that a UK company set up in the Netherlands as a joint venture between ICI and an Italian company was not entitled to tax credit under art. 10 of the Double Taxation Relief (Taxes on Income) (Netherlands) Order 1980 ("the 1980 order") in respect of dividends received from a UK subsidiary.
In 1986 EVC, a Netherlands company, was set up by Imperial Chemical Industries plc ("ICI") as a joint venture with an Italian company ("EniChem") for the purpose of carrying out a joint venture to produce PVC products.
On 8 October 1986 ICI and EniChem entered into a shareholders' agreement to provide for the share capital and management structure of EVC. ICI and EniChem were to be equal shareholders with no casting vote in the event of disagreement. Resolutions in general meetings had to be passed by an absolute majority of the valid votes cast by representatives of at least two thirds of the issued share capital.
A management board was to report to a supervisory board and to obtain the supervisory board's approval for certain decisions. Neither shareholder could act at either management board or supervisory board level without the consent of the other.
On 24 May and 30 December 1988 a UK subsidiary paid two dividends to EVC of nearly £3m and over £14m respectively, in respect of which EVC claimed tax credit under art. 10(3)(c) of the 1980 order.
The claim for tax credit was refused by the inspector of foreign dividends on the grounds that the conditions in art. 10(3)(d) of the order were not satisfied. No tax credit was payable unless the company could show that it was not controlled "by a person or two or more associated or connected persons together". By the Income and Corporation Taxes Act 1988 section 839 subsec-or-para (7)Income and Corporation Taxes Act 1988, s. 839(7), any two or more persons acting together to secure or exercise control of a company were treated as connected with each other.
The special commissioners allowed an appeal on the basis that ICI and EniChem had not "acted together to secure or exercise control" of EVC, but the inspector's appeal was allowed by the court.
There were two questions raised in the Court of Appeal: whether ICI and EniChem were, at the time the dividends were paid, "persons acting together to secure or exercise control" of EVC within Income and Corporation Taxes Act 1988 section 839 subsec-or-para (7)s. 839(7); and if so whether the connection in relation to EVC withinIncome and Corporation Taxes Act 1988 section 839 subsec-or-para (7)s. 839(7) was a connection "for any purpose" under the laws of the UK relating to the taxes covered by the 1980 order within the meaning of art. 10(3)(d). It was not disputed that ICI and EniChem had control of EVC within the definition of "control of a company" in Income and Corporation Taxes Act 1988 section 416 subsec-or-para (2)s. 416(2), for they owned all the shares. The question was whether they had acted together to exercise or secure that control.
EVC contended that since the mere coincidence of voting the same way at general meetings was insufficient, there was no evidence of "acting together" in any relevant sense. Further, even if the shareholders were "acting together", art. 10(3)(d) of the order did not apply where the only issue in dispute was the availability of tax credit. The words "for any purpose" envisaged the existence of some issue between EVC and the Revenue other than the availability of tax credit.
Held, dismissing EVC's appeal;
1. The shareholders' agreement, in force at the material time when the dividends were paid, provided in detail for the constitution, funding and administration of the joint venture through the medium of EVC. As such it imposed shareholders' control over EVC at the level of general meeting. The shareholders were therefore acting together to exercise control of EVC, within the meaning of Income and Corporation Taxes Act 1988 section 839 subsec-or-para (7)s. 839(7) of the 1988 Act, in observing and performing the agreement and voting at general meetings of EVC in the manner required by the shareholders' agreement.
2. Since the shareholders were acting together and thereby exercising control of EVC within the meaning of Income and Corporation Taxes Act 1988 section 839 subsec-or-para (7)s. 839(7) of the 1988 Act, they "could be treated as having control [of EVC] for any purpose" within art. 10(3)(d) of the 1980 order.There was no requirement that there should be some issue between the Revenue and EVC other than the availability of tax credit to bring the case within art. 10(3)(d) the 1980 order.
Morritt LJ: Generally speaking a company resident in the UK pays corporation tax on its profits and its members likewise resident in the UK pay tax (corporation tax or income tax depending on whether they are bodies of persons or individuals) on the dividends they receive from the company as a part of their taxable income. To avoid what might appear to be double taxation it is provided by the Income and Corporation Taxes Act 1988 section 231Income and Corporation Taxes Act 1988, principally s. 231, that the advance corporation tax element of the gross dividend paid by the company is credited to the persons receiving the dividend in such a way that it is treated as having been paid by the recipient on account of his liability to tax on his income. If the amount of credit exceeds the amount of the tax payable by the recipient then to that extent the credit is repayable to him.
Where either the company paying the dividend or the person receiving it is not resident in the UK then these general rules may require adjustment to take account of any Double Taxation Convention which is concluded between the UK and the other country concerned. Such double taxation conventions are incorporated into the law of the UK by Orders in Council made under Income and Corporation Taxes Act 1988 section 788s. 788 of the Income and Corporation Taxes Act 1988.
The taxpayer, EVC International NV (formerly called European Vinyls Corporation (Holdings) NV) ("EVC"), was incorporated under the laws of the Kingdom of the Netherlands in 1986 for the purpose of carrying out a joint venture, to which I shall refer in greater detail later, agreed on between ICI plc and EniChem SpA, a company incorporated in the Republic of Italy. EVC is resident in the Netherlands and its shares are not quoted on any stock exchange. It has a wholly owned subsidiary, European Vinyls Corporation (UK) Ltd, which is resident and carries on business in the UK. On 28 May and 30 December 1988 the latter company declared and paid to EVC dividends of £2,923,308.16 and £14,249,999.33 which gave rise to a claim from EVC for tax credits against its liability to UK tax of £316,691.72 and 1543,749.93 respectively. As it had no such liability it sought repayment of the amounts of the credits.
The validity of that claim depended on the proper construction and effect of art. 10(3)(d) of The Double Taxation Relief (Taxes on Income)(Netherlands) Order 1980 ("the 1980 Convention"). That article required EVC to establish that:
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(i) … it is not controlled by a person or two or more associated or connected persons together, who or any of whom would not have been entitled to a tax credit if he had been the beneficial owner of the dividends
on the basis that, as provided by the article:
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(ii) For the purposes of this sub-paragraph a person or two or more associated or connected persons together shall be treated as having control of a company if under the laws of the UK relating to the taxes covered by this Convention he or they could be treated as having control of it for any purpose, and persons shall be treated as associated or connected if under those laws they could be so treated for any purpose …
The Revenue contended that EVC was unable to discharge that onus because, as is common ground, EniChem SpA would not have been entitled to a tax credit due to the terms of the Double Tax Convention between the UK and the Republic of Italy then in force and because EniChem SpA and ICI between them controlled EVC and, which is and was disputed, were connected persons within the definition of that term contained inIncome and Corporation Taxes Act 1988 section 839 subsec-or-para (7)s. 839(7) of the Income and Corporation Taxes Act 1988. That...
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