Test Claimants in the Act Group Litigation (Classes 2 and 4) v HM Revenue and Customs

JurisdictionEngland & Wales
JudgeMR JUSTICE HENDERSON,Mr Justice Henderson
Judgment Date26 February 2010
Neutral Citation[2010] EWHC 359 (Ch)
Docket NumberCase No: (A4) - HC05C00732 & ors
CourtChancery Division
Date26 February 2010
Test Claimants in the Act Group Litigation (Class 4) Test Claimants in the Act Group Litigation (Class 2)
The Commissioners for Her Majesty's Revenue and Customs

[2010] EWHC 359 (Ch)


Mr Justice Henderson

Case No: (A4) - HC05C00732 & ors

Case No: (A2) – HC01C02533 & ors



Royal Courts of Justice

Strand, London, WC2A 2LL

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

Mr Ian Glick QC, Mr David Ewart QC and Mr Ian Hutton (instructed by the Solicitor for HMRC) for the Defendants

Hearing dates: 27, 28 and 29 October 2009

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.


I. Introduction: Background and issues


On 8 March 2001 the Court of Justice of the European Communities ("the ECJ") delivered its landmark judgment in the Hoechst case: joined cases C-397 and 410/98 Metallgesellschaft Ltd and others and Hoechst AG and Hoechst (UK) Ltd v Commissioners of Inland Revenue and HM Attorney General, [2001] ECR I-1727, [2001] Ch 620. The ECJ held that it was contrary to Article 52 (later Article 43) of the EC Treaty, which protects freedom of establishment, for the UK to allow a UK-resident subsidiary to pay a dividend to its parent company under a group income election ("GIE"), and thus to avoid having to pay advance corporation tax ("ACT"), in circumstances where the parent company was also resident in the UK, but to deny that opportunity to a UK-resident subsidiary when its parent company was resident in another member state.


In paragraph 96 of its judgment the ECJ answered the second question referred to it by the English High Court (concerning remedies) in the following terms:

"96. The answer to the second question referred must therefore be: where a subsidiary resident in one member state has been obliged to pay [ACT] in respect of dividends paid to its parent company having its seat in another member state even though, in similar circumstances, the subsidiaries of parent companies resident in the first member state were entitled to opt for a taxation regime that allowed them to avoid that obligation, Article 52 of the Treaty requires that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they have sustained and from which the authorities of the member state concerned have benefited as a result of the advance payment of tax by the subsidiaries. The mere fact that the sole object of such an action is the payment of interest equivalent to the financial loss suffered as a result of the loss of use of the sums paid prematurely does not constitute a ground for dismissing such an action. While, in the absence of Community rules, it is for the domestic legal system of the member state concerned to lay down the detailed procedural rules governing such actions, including ancillary questions such as the payment of interest, those rules must not render practically impossible or excessively difficult the exercise of rights conferred by Community law."


Two points may be noted at this stage. First, the ECJ did not hold ACT to be an unlawful tax. The unlawfulness identified by the Court lay in the restriction of the right of establishment of non-UK resident parent companies by denying them and their UK-resident subsidiaries the opportunity to make GIEs. It was only where ACT was paid in such circumstances, and where (in addition) the parties would have made a GIE had it been open to them to do so, that the ACT in question was unlawfully levied and the UK was obliged to provide an effective remedy by way of reimbursement or reparation of financial loss. The second point is that, on the facts of the cases considered by the ECJ, the ACT paid by the UK subsidiaries had all subsequently been set off against mainstream corporation tax ("MCT") for which they became liable. Accordingly the only remedy which was required was compensation for the premature levy of the ACT, which in the eyes of the ECJ was not a separate tax but merely an advance payment of corporation tax: see, for example, paragraph 6 of the judgment. Although loosely and conveniently described as claims for interest on the prematurely paid tax, the claims could more accurately be characterised as restitutionary claims relating to the loss of use of the money paid as ACT between the date of payment and the date of set off against MCT.


Until the abolition of ACT with effect from 6 April 1999, a United Kingdom company which received a dividend in respect of which ACT had been paid was entitled to a tax credit equal to the amount of the ACT. This was the result of section 231(1) of the Income and Corporation Taxes Act 1988 (" ICTA 1988"), which provided as follows:

"Subject to sections 95(1)(b) and 247, where a company resident in the United Kingdom makes a qualifying distribution and the person receiving the distribution is another such company or a person resident in the United Kingdom, not being a company, the recipient of the distribution shall be entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made."

The aggregate amount of the dividend and the tax credit constituted franked investment income ("FII"), which the recipient company could use to frank the ACT payable on its own distributions. Where, however, a GIE was made, the corollary of the avoidance of liability to ACT was that there was no entitlement to a tax credit while the election remained in force, and dividends which were paid under the election ("election dividends") were excluded from the parent company's FII: see section 247(2) of ICTA 1988, which provided that while a GIE was in force

"the election dividends shall be excluded from sections 14(1) and 231 and are accordingly not included in references to franked payments made by the paying company or the franked investment income of the receiving company but are in the Corporation Tax Acts referred to as "group income" of the receiving company."


As a matter of UK domestic law, a parent company resident outside the UK could not be entitled to a tax credit on dividends which it received from a UK subsidiary, because section 231(1) expressly confined such entitlement to UK resident companies. However, double taxation conventions ("DTCs") entered into between the UK and foreign states often conferred entitlement to a UK tax credit on dividends received from UK subsidiaries, and where they did so the credit would typically be one half of the credit which would have been available to an individual shareholder resident in the UK under section 231. By virtue of section 788(1) and (3)(d) of ICTA 1988, such arrangements in a DTC were given effect in UK domestic law and prevailed over any provisions of domestic law which were inconsistent with them. The relevant wording in section 788(3) was as follows:

"(3) Subject to the provisions of this Part, the arrangements shall, notwithstanding anything in any enactment, have effect in relation to income tax and corporation tax in so far as they provide –

(d) for conferring on persons not resident in the United Kingdom the right to a tax credit under section 231 in respect of qualifying distributions made to them by companies which are so resident."


It so happens that the DTC between the UK and the Federal Republic of Germany which was in force at the relevant times did not grant a right to a tax credit to companies resident in Germany which held shares in and received dividends from companies resident in the UK. All of the parent companies involved in the Hoechst litigation were resident in Germany, so although ACT was paid on the dividends which they received from their UK subsidiaries, they had no right to a tax credit, either directly under section 231 or by virtue of a DTC and section 788.


In many cases, however, DTCs between the UK and other member states did grant partial tax credits to parent companies in receipt of dividends from UK subsidiaries. Examples were the DTC between the UK and the Netherlands of 7 November 1980 and the DTC between the UK and Italy of 21 October 1988 (although it should be noted that until April 1991 the DTC with Italy did not so provide). For example, Article 10(3)(c) of the Netherlands convention entitled a company resident in the Netherlands which received dividends from a company resident in the UK to:

"a tax credit equal to one half of the tax credit to which an individual resident in the United Kingdom would have been entitled had he received those dividends, and to the payment of any excess of that tax credit over its liability to tax in the United Kingdom."

By virtue of Article 3(2), "tax credit" here has the same meaning as in ICTA 1988. By virtue of Article 10(3)(a)(ii), a convention tax credit was liable to UK income tax at a rate not exceeding 5% on the total amount of the dividend and the tax credit. The relevant provisions of the Italian convention were materially identical. Thus a parent company resident in either of those member states which received a dividend from a UK subsidiary was entitled to payment of the partial tax credit after deduction of UK income tax at a rate not exceeding 5% on the aggregate of the dividend and the credit.


In cases of this nature, it was clearly necessary to decide whether, and if so how, receipt of such partial tax credits affected the reimbursement or reparation recoverable from the UK for its breach of Article 43 in not...

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