The Court of Appeal held that a claim by the UK branch of a Swiss bank for relief equivalent to that available to a UK resident company in the limited circumstances set out in ICTA 1988, s. 243 was not a claim for relief from corporation tax for the purposes of s. 788(3)(a). Moreover, such relief was not a right to a tax credit under s. 231 in respect of qualifying distributions made by companies resident in the UK for the purposes of s. 788(3)(d).

Facts

The taxpayer, a Swiss bank, in respect of its UK branch appealed against refusal of a claim to relief under ICTA 1988, s. 243. The taxpayer carried on business in London through a branch. The agreed corporation tax computations showed that, in the relevant years, the taxpayer had accumulated substantial trading losses. It had received dividends from UK resident companies and received and paid manufactured dividends' (within ICTA 1988, s. 737 and Sch. 23A). During the relevant years, the surplus of UK dividends (and manufactured dividends) received by the taxpayer over manufactured dividends paid amounted to £233,282,021 (the ‘distributions’). Had the taxpayer been a person resident in the UK, the distributions would have carried tax credits, under ICTA 1988, s. 231, of £58,320,506.

The taxpayer claimed pursuant to ICTA 1988, s. 788(6) relief under s. 788(3)(a). The basis of that claim was that art. 23 (the non-discrimination article) of the UK–Switzerland Double Taxation Convention should have effect to provide relief for the taxpayer so that it should be entitled to claim under ICTA 1988, s. 243 for those years the same relief as would be available to a UK resident company carrying on the same activities as the taxpayer. Following the refusal of its claim, the taxpayer appealed to the special commissioners. They dismissed the appeal on the basis that, although the refusal of the tax credit amounted to discrimination proscribed by the UK–Switzerland Double Tax Convention, discrimination in relation to entitlement to a tax credit had not been incorporated into UK law by the operation of s. 788(3)(a) ((2005) Sp C 480).

On appeal the High Court agreed with the special commissioners' conclusions in relation to art. 23(2) and s. 788(3)(a). But the judge held that the denial of a right to a tax credit amounted to an infringement of the non-discrimination provision which was given effect by s. 788(3)(d) ([2006] BTC 232). Accordingly, the Revenue appealed against the judge's decision in relation to art. 23(2) and of s. 788(3)(d). The taxpayer appealed against the judge's conclusions in relation to s. 788(3)(a), which did not arise if the judge was correct in his views as to the effect of s. 788(3)(d).

Issue

Whether tax was ‘less favourably levied’ on the taxpayer within art. 23 of the UK–Switzerland Double Taxation Convention; whether the claim was for ‘relief from corporation tax’ within ICTA 1988, s. 788(3)(a); and whether the taxpayer's right under the treaty to s. 243 tax credits had been incorporated into UK law by s. 788(3)(d).

Decision

The Court of Appeal (Sedley, Arden and Moses L JJ) allowed the Revenue's appeal and dismissed the cross-appeal.

Section 788(3) (d)

The taxpayer could not take advantage of s. 243 because, since it was not a company resident in the UK, it was not in receipt of franked investment income, as defined in s. 238(1). It was not entitled to a tax credit under s. 231 for a similar reason; it was not resident in the UK. But that apparent discrimination was of no avail unless the taxpayer could show that by virtue of s. 788(3), it could rely on that infringement of art. 23(2) in domestic law.

Section 788(3)(d) gave effect to those arrangements which provided for conferring the right to a tax credit under s. 231 in respect of qualifying distributions. The taxpayer could not rely on any provision within art. 10 as conferring a right to a tax credit since there was none. The only entitlement to a tax credit under the convention was in the circumstances identified in art. 10(3)(c), which did not apply to the taxpayer because it did not control any proportion of the voting power of the companies paying the dividend. It was inconceivable that, having expressly agreed a limited entitlement to a tax credit, that agreement should be overridden by the prohibition in relation to permanent establishments in art. 23(2), not least when there was specific reference to such establishments in art. 10(3)(c) and art. 10(5). Article 10(3)(c) was given effect in UK law by s. 788(3)(d). The parties made express provision for the tax treatment of dividends received from companies resident in the UK by the permanent establishments of non-resident Swiss enterprises, without any entitlement to a tax credit.

Article 10(5) was given effect in domestic law by s. 788(3)(c). Accordingly, the only provision in the convention which conferred a non-resident with a right to a tax credit in respect of qualifying distributions was art. 10. It was that provision alone to which effect was given by s. 788(3)(d).

Section 788(3) (a)

In seeking to secure equal treatment under art. 23(2), the taxpayer was seeking payment of a tax credit, in an amount calculated by reference to the distributions it had received. It was not seeking relief because there was no liability to an amount of tax which would otherwise be payable. Thus the taxpayer was not entitled to invoke art. 23(2) as what it was seeking, in order to secure equal treatment, was not within s. 788(3)(a). Moreover, if that which the taxpayer was seeking was to be regarded as relief against corporation tax, the result would be the same as that to which the court objected in relation to s. 788(3)(d).

The taxpayer would have secured for itself entitlement to a tax credit outside the express agreement of the parties in relation to tax credits, as contained in art. 10.

Article 23 (2)

It was not necessary to decided whether ‘taxation was less favourably levied’ on the taxpayer in the circumstances. Moses LJ would have held that the process of determining whether a company was entitled to a tax credit was part of the process by which liability was declared and that there was no warrant for limiting the prohibition against discrimination merely to the stage of collection which depended upon the prior processes of computation, liability and return or assessment. Arden LJ would have held that a claim for relief under s. 243 did not form part of the taxation of UK resident companies for purposes of art. 23(2).

Court of Appeal (Civil Division).
Judgment delivered 21 February 2007.