The House of Lords ruled that the denial of the right of election under ICTA 1988, s. 247 to groups with foreign parents did not infringe the non-discrimination articles of the double taxation convention (DTC) between the UK and Japan or of the DTC between the UK and the US.

Facts

Under the legislation relating to advance corporation tax (ACT) a UK parent and subsidiary could make a group income election which meant that the subsidiary did not have to pay ACT on dividends. In Metallgesellschaft v IR Commrs; Hoechst AG v IR Commrs (Joined Cases C-397/98 and 410/98) [2001] BTC 99; [2001] ECR I-1727 the European Court of Justice held that limiting group income elections to UK parents was contrary to the freedom of establishment provisions (art. 43 EC). Following that decision numerous foreign companies made claims for repayment of ACT and a group litigation order (GLO) was made. Parent companies resident in the US and Japan relied on the non-discrimination articles in the relevant double tax agreements. The relevant non discrimination articles provided that UK companies, the capital of which was owned or controlled by residents of Japan/US, should not be subject to any taxation or any requirement connected therewith which was more burdensome than the tax, etc. to which other similar UK enterprises might be subjected.

Park J dismissed the taxpayers' claims holding that there had been a breach of the non-discrimination article but that the provisions had not been incorporated into UK law in relation to ACT ([2004] BTC 208). The taxpayer appealed to the Court of Appeal contending that the ACT provisions of ICTA 1988 were in breach of the non-discrimination article in the double tax conventions (DTCs) with Japan and the US; and that the non-discrimination article was given direct and overriding effect as part of UK law by the opening words of ICTA 1988, s. 788(3). The Revenue cross-appealed arguing that the judge had been wrong to permit amendments to the pleadings to plead overpayment of ACT as a result of unlawful demand and/or mistake of law, and that there had been no unlawful demand and that any claim in restitution would be limited by the principle that interest or compensation for the time value of money could not be claimed where there was no outstanding principal amount.

The Court of Appeal dismissed the appeal but allowed the cross-appeal ([2006] BTC 266). Both Park J and the Court of Appeal held that s. 247 infringed the non-discrimination article in the DTCs because it subjected an enterprise in the UK, namely the subsidiary of a US or Japanese parent, to taxation namely, payment of ACT which a similar enterprise, namely a subsidiary of a UK parent, would (if they had made an election) not have had to pay. Further, the DTCs had not been incorporated into English law and s. 247 did not give effect in domestic law to any arrangements which a DTC might make about liability to ACT. The infringement of the DTCs therefore gave rise to no cause of action in English law.

The claimants appealed against the ruling that the DTCs had not been incorporated into English law. The Revenue's primary submission was that both the judge and the Court of Appeal had been wrong to hold that the denial of a right of election to groups with foreign parents infringed the non-discrimination articles in the DTCs.

Issue

Whether s. 247 discriminated against a UK company on the ground that its capital was wholly or partly owned or controlled, directly or indirectly, by residents of the US or Japan, or some other foreign state.

Decision

Lord Hoffmann (Lords Woolf, Walker, Mance and Neuberger agreeing) (dismissing the appeal) said that s. 247 did not discriminate against a UK company on the basis that the subsidiary's capital was controlled by a non-UK resident company. It was not possible to decouple the positions of parent and subsidiary as the judge and the Court of Appeal sought to do. To allow an election by a group with a US-resident parent would not be to give a relief available to a group with a UK-resident parent. It would not be an election as to who would be liable for ACT but as to whether the group should pay it at all.

Those arguments were in substance those put forward by the UK Government to the Court of Justice in the Hoechst decision but rejected. The prohibition on discrimination implied in art. 43 of the EC Treaty had a different purpose from the prohibition on discrimination in the DTCs. Freedom of establishment under art. 43 was the freedom of the resident of a member state to establish itself in another member state. In the case of parent and subsidiary, it was the freedom of the parent to establish a subsidiary. Discrimination against the group as a whole was thus a restriction on the parent's freedom of establishment. If a group with a UK parent had a cash flow advantage which a group with a parent in another member state did not enjoy, that was a restriction on the latter's freedom of establishment. Fortunately, by the time of the decision in Hoechst, ACT had been abolished. So no one had to decide how the decision should be given effect for the future. However, it would not have been possible simply to give a group with a parent in another member state the right to elect under s. 247. That would have enabled it to elect not to pay ACT and put it in a better position than a group with a UK parent. It would have been necessary either to repeal s. 247 or abolish ACT.

A DTC, on the other hand, did not give a company or individual resident in one country a right of establishment in the other. The equality it ensured was only that any enterprise it owned in the other country would not be subject to taxation which discriminated on the ground of its foreign control. The denial of the right of election was not on the ground of the company's foreign control but on the ground that s. 247 could not be applied to a case in which the parent company was not liable to ACT.

It followed that the lower courts were wrong in holding that s. 247 imposed discrimination on subsidiaries of US and Japanese parent companies, contrary to the respective DTCs. In those circumstances, it would be artificial to decide whether s. 788 incorporated a provision of the DTC which did not actually exist.

House of Lords.
Judgment delivered 23 May 2007.