European Court of Justice

Ministero dell'Economia e delle Finanze (formerly Ministero delle Finanze) v Part Service Srl, company in liquidation (formerly Italservice srl) (Case C-425/06)

VAT – abusive practice

Italservice and a leasing company, both belonging to the same financial group, were involved together in leasing arrangement transactions mainly in connection with motor vehicles. The leasing company concluded a contract with a customer for the use of a motor vehicle with an option to purchase. Italservice concluded a contract with the customer under which it insured the vehicle against all risks except civil liability.

Following investigations carried out into Italservice the Italian tax office held that, although the different agreements signed by the interested parties were contained in separate contracts, they together constituted a single contract concluded between three parties. According to that office, the consideration paid by the customer for the leasing arrangement had been artificially divided to reduce the taxable amount, as the role of lessor was split between Italservice and the leasing company.

The following questions were referred to the ECJ for a preliminary ruling:

1. “Does the concept of abuse of rights defined in the judgment of the Court of Justice in [Halifax and Others] as transactions, the essential aim of which is to obtain a tax advantage, correspond to the definition transactions carried out for no commercial reasons other than a tax advantage, or is it broader or more restrictive than that definition?
2. For the purposes of VAT, may there be considered to be an abuse of rights (or of legal form), with the consequent loss of Community own revenue accruing from value added tax, where contracts for leasing arrangements (locazione finanziaria), financing, insurance and intermediation contracts are concluded separately with the effect that only the consideration paid in respect of the grant of the right to use the goods is subject to VAT, whereas a single contract of leasing in accordance with the practice and interpretation of national case-law would include the financing and would therefore make the whole of the consideration subject to VAT?’”

The ECJ ruled that the Sixth Directive must be interpreted as meaning that there can be a finding of an abusive practice when the accrual of a tax advantage constitutes the principal aim of the transaction or transactions at issue. However, the Sixth Directive did not require the highest amount of VAT to be paid, provided there was no abusive practice.

It was for the national court to determine, whether, transactions such as those at issue could be considered to constitute an abusive practice under the Sixth Directive.

For further information, see page 30.

Netto Supermarkt GmbH & Co OHG v Finanzamt Malchin (Case C-27 1/06)

VAT - exports

Netto Supermarkt, which operates several discount supermarkets in Germany, refunded to its customers several thousand German marks which they had paid in the form of VAT. It had decided to make those reimbursements to nationals of non-member countries if they were able to show proof of export outside the Community of goods bought on the occasion of noncommercial trips. The German tax investigation office found that a substantial proportion of the proofs of export of goods had been counterfeited by Polish nationals with the help of forged customs forms or that the alleged proofs of export had been marked with a forged customs stamp. By this means, Polish nationals claimed reimbursement of VAT from Netto Supermarkt, which was refunded to them. The Finanzamt assessed Netto Supermarkt to payment of the additional VAT due for those years corresponding to the turnover actually generated during those years.

The following question was referred to the ECJ for a preliminary ruling:

“Do the provisions of Community law on exemption from tax for exports to a third country preclude the granting of exemption from tax by the Member State on the grounds of fairness where the conditions for exemption are not satisfied but the taxable person was unable, even by exercising due commercial care, to recognise that they were not met?”

The ECJ held that the Sixth Directive must be interpreted as not precluding a Member State from granting an exemption from VAT on the supply of goods for export to a destination outside the Community where the conditions for such an exemption were not met, but the taxable person was not able to recognise – even by exercising due commercial care – that they were not met, because the export proofs provided by the purchaser had been forged.

For further information, see page 31.

Jager v Finanzamt Kusel-Landstuhl (Case C-256/06)

Inheritance tax – free movement of capital

The reference has been made in proceedings concerning the calculation of inheritance tax payable in respect of an inheritance consisting of assets situated in Germany and property in the form of agricultural land and forestry situated in France and, in particular, the rules on the valuation of those assets.

The entire estate of a person domiciled in Germany, including assets situated outside Germany is subject to inheritance tax. If inheritance tax has been paid outside Germany then that inheritance tax shall be deductible against German inheritance tax to the extent that it is payable on those assets.

The taxpayer, who was resident in France, was the sole heir of his mother, who died in 1998 and was last living in Germany. In addition to assets in Germany, the estate contained land in France used for agriculture and forestry. French inheritance tax was also due on the land in France, based on market value. If the land had been located in Germany, the value on which inheritance tax would be calculated would be 10% of the market value.

The following question was referred to the ECJ:

“Is it compatible with Article 73b(1) of the Treaty establishing the European Community (now “Article 56(1) EC) that for inheritance tax purposes:

1. assets (held abroad) consisting of agricultural land and forestry situated in another Member State are valued in accordance with their fair market value (current market value), whereas a special valuation procedure exists for domestic assets consisting of agricultural land and forestry, the results of which amount on average to only 10% of their fair market value, and
2. assessment of the acquisition of domestic assets consisting of agricultural land and forestry is excluded up to a special tax-free amount and the remaining value is assessed merely at 60%,

if, in the case of an heir inheriting an estate made up of both domestic assets and foreign assets consisting of agricultural land and forestry, this results in a situation whereby, as a result of the fact that the assets consisting of agricultural land and forestry are situated abroad, the acquisition of the domestic assets is subject to higher inheritance tax than would be applicable if the assets consisting of agricultural land and forestry were also domestic assets?”

The ECJ ruled that the free movement of capital must be interpreted as precluding legislation of a Member State which, for the purposes of calculating the tax on an inheritance consisting of assets situated in that State and agricultural land and forestry situated in another Member State as in this case. There is only movement of capital in inheritance tax if there is a cross-border aspect to it.

For further information, see page 32.

NV Lammers & Van Cleeff v Belgium (Case C-105/07)

Interest classified as dividends – free movement of capital

A Belgian subsidiary paid interest to its Dutch parent company. That interest was considered by the Belgian tax authorities to be dividends. The contentious issue was that interest payments were not reclassified as dividends if made to a Belgian company, whereas those interest payments were reclassified as dividends if made to a foreign company.

The following is the question referred to the ECJ for a preliminary ruling:

“Do Articles 12 EC, 43 EC, 46 EC, 48 EC, 56 EC and 58 EC preclude Belgian national statutory rules, as set out in the then applicable Articles 18(1), point 3, and 18(2), point 3, of the Income Tax Code 1992, whereby interest payments were not reclassified as dividends, and were therefore not taxable, if those interest payments were made to a director which was a Belgian company, whereas in the same circumstances those interest payments were reclassified as dividends, and therefore taxable, if they were made to a director which was a foreign company?”

The ECJ firstly examined the freedom of establishment. The Court ruled that the freedom of establishment precludes national legislation as in this case, i.e. under which interest payments made by a company resident in a Member State to a director which is a company established in another Member State are reclassified as dividends and are, on that basis, taxable, where, at the beginning of the taxable period, the total of the interest-bearing loans is higher than the paid-up capital plus taxed reserves, whereas, in the same circumstances, where those interest payments are made to a director which is a company established in the same Member State, those payments are not reclassified as dividends and are, on that basis, not taxable.

A national measure restricting freedom of establishment might be justified where it specifically targeted wholly artificial arrangements designed to circumvent the legislation.

As it was held that the freedom of establishment precludes national legislation, it was not necessary to examine whether the free movement of capital provisions also precluded that legislation.

For further information, see page 33.

UK Court of Appeal (Civil Division)

Bank of Ireland Britain Holdings Ltd v R &’ C Commrs [2008] EWCA Civ 58

Tripartite ‘repo’ transaction-interest

This was an appeal from a High Court judgment dated 30 April 2007 by which the Revenue's appeal from a decision of the Special Commissioners released on 6 June 2006 was dismissed.

The taxpayer company was a private limited company, incorporated and registered in the UK and resident for tax purposes in the UK. It was a wholly owned subsidiary of an Irish resident and incorporated company.

The key question in the case was whether a tax avoidance scheme succeeded in its object of generating a loss for tax purposes in a situation where the taxpayer suffered no corresponding commercial loss.

The scheme involved a transaction for the sale and repurchase of securities, generally known to tax specialists as a “repo”. This particular “repo” involved three parties, and dividends were paid on the securities during the period for which it operated. The amount of the loss, if the scheme worked, was equivalent to the dividends actually paid to the Irish resident company during its period of ownership of the relevant securities, a sum of approximately £3.6 million. This sum also comprised most of a so-called “manufactured overseas dividend” which is deemed to have been paid by the taxpayer, and which is prima facie deductible by the taxpayer as a charge on income in computing its taxable profits.

The taxpayer simply submitted that the relevant legislation admits of only one construction, and if the result was not to the Revenue's liking, they say that the Revenue had only itself to blame for procuring the enactment of such complex deeming provisions without giving enough thought to the consequences.

The Court of Appeal upheld the decision of the High Court. The starting point in the decision was that the ordinary meaning of the words plainly pointed to the payment of interest being treated as paid to the interim holder. It was acknowledged that in this case a tripartite scheme had been devised which takes advantage of a mismatch between the two sets of sections.

The Legislation has since been amended to counteract the scheme.

For further information, see page 34.

Pirelli Cable Holding NV & Ors v R &’ C Commrs [2008] EWCA Civ 70

ACT

This was an appeal from a High Court judgment dated 23 March 2007 which found in favour of the Revenue.

This case was described in the High Court as part of the “forensic fallout” of the decision of the Court of Justice of the European Communities (“the ECJ”) in Metallgesellschaft Ltd v. Inland Revenue Commissioners and Hoechst AG v. Inland Revenue Commissioners (Joined Cases C-397 and 410/98); [2001] Ch. 620 (“Hoechst”). The essence of the Hoechst decision was that United Kingdom revenue law, which had between 1973 and 1999 allowed companies with parents resident in the United Kingdom (“UK”) to elect to pay dividends to those parents free of advance corporation tax (“ACT”), discriminated unlawfully against companies with parents resident in other member states by not giving them a like right of election.

This case had gone as far as the House of Lords and had been remitted to the High Court. The taxpayer put forward a new argument that the DTA tax credit which the non-UK resident company received should not being treated as a DTA credit to which those companies were not entitled.

The High Court had ruled that if a group election had been made, the non-UK resident parent would not have been entitled to a tax credit upon the payment by the subsequent payment by the UK subsidiary of its mainstream corporation tax. The Court of Appeal upheld the decision of the High Court. A Member state is not obliged to offer double tax relief; it is merely obliged to tax a recipient in the same fashion irrespective of the source of the income.

For further information, see page 36.

UK High Court (Chancery Division)

Blackburn & Anor v R &’ C Commrs [2008] EWHC266 (Ch)

Enterprise investment scheme (EIS)

This appeal concerns the availability of relief under the Enterprise Investment Scheme in respect of shares issues made by a company to the taxpayer.

The EIS is a tax incentive scheme which encourages individuals such as the taxpayer to invest in unquoted trading companies. In this case the appeal was concerned with the availability to the taxpayer of deferral relief in respect to the EIS shares issued to him by the company. Deferral relief takes effect so that CGT that would otherwise have arisen on a disposal by an individual of chargeable assets is deferred until the EIS shares are disposed of.

The company had made several issues of shares to the taxpayer. The taxpayer had invested money informally with the company without a contract of allotment or a share application. This had occurred before any application was made for the issue of shares, or before the issue of shares had been complete.

HMRC contended that the shares did not qualify as EIS shares. The basis for this contention was that either the money was paid in advance of any subscription for shares so that the value received rules applied; or the shares were not fully paid up at the time of issue.

The High Court allowed the taxpayer's appeal on the grounds that the taxpayer provided monies to the Company with a view to the Company spending the money on qualifying expenditure, on which the Company duly spent it. There had been a general intention to subscribe for shares so the money received by the Company was on account of capital and not a loan.

For further information, see page 37.

Special Commissioners

HSBC Holdings plc & Ors v R &’ C Commrs

Stamp duty/capital duty

The Special Commissioners have referred the question to the ECJ whether the charge to stamp duty reserve tax contravenes the Capital Duty Directive and art. 43, 49 and 56 of the EC Treaty.

For further information, see page 38.

Kilbride & Ors v R &’ C Commrs

Closure notice

This decision related to applications made by the applicants for directions requiring an officer of the Board (in the case of the individuals) or the Inland Revenue (in the case of the company) to issue closure notices.

It was concluded that there were reasonable grounds for not issuing a direction for the issue or giving of closure notices to have immediate effect.

The enquiries in issue arose from the activities of four overseas companies. HMRC had been able to trace, through Land Registry and District Valuation documents, 202 property transactions in Preston, Blackburn and neighbouring towns in which the companies had acted as buyer or seller, or both, between 1 October 1999 and 13 October 2006.

None of the companies had made a tax return in this country. Other transactions had been discovered where a purchase or a sale was known to have occurred, but not both, and the information available to the respondents was not necessarily complete so that the figures mentioned were the minimum amounts, not necessarily the full amounts. HMRC did not know who the directors of all the companies were and they had not been informed of that by anyone acting on behalf of the companies in the UK.

It was a fact that HMRC did not have those details and that lack of information was relevant to the question whether it was reasonable that the enquiries should continue regardless of whether there had been non-compliance with any obligation to disclose.

For further information, see page 40.

Collins v R &’ C Commrs

CGT – share sale agreement

The appellant was a director and shareholder of a company and in April 1997 he announced his intention to retire from the company and began discussions about pension contributions to be made in respect of past service. On 25 March 1999 the appellant and the other shareholders of the Company entered into a share sale agreement with a Purchaser (another company) for the sale of all the shares in their Company.

Based on the share purchase agreement, a sum of money was to be paid to the taxpayer and/or the Company upon completion. This sum was to be used as a contribution to the pension scheme.

HMRC contended that the sum was a payment made to the appellant as part of the consideration for the sale of his shares and therefore that it was chargeable with capital gains tax. The appellant contended that the sum was not paid to him.

It was decided that the sum was not subject to capital gains tax. The basis for this decision was the plain wording and effect of the share purchase agreement that the appellant did not receive the sum and his role was only to trigger the payment between the Purchaser and the Company.

For further information, see page 41.

Dunne v R & C Commrs

Taxpayer's failure to attend hearing

An appeal had been heard in the absence of the taxpayer. Reasons for dismissing the appeal were released after the hearing.

The taxpayer wrote to the Special Commissioners applying for the decision to be set aside. His letter contained technical grounds and also explained that his wife had been very ill.

The taxpayer was advised to lodge a statement setting out in full the reasons for his failure to appear at the hearing and to support his statement with any documentation relating to the state of health of his wife.

The Special Commissioner dismissed the taxpayers request to set aside the original decision. The basis for this decision was that the reasons for non-attendance at the original hearing had been taken into account by that Special Commissioner in reaching his decision to go ahead with the hearing in taxpayer's absence.

For further information, see page 42.

Grace v R &’ C Commrs

Residence/Ordinarily residence

The Appellant is a British Airways pilot and receives income from that employment which is paid into his bank in the United Kingdom.

He was born in South Africa, moved to Kenya, and then returned to South Africa. He trained as a pilot in South Africa. He had lived in the UK but decided to return to South Africa, while continuing to work as a British Airways pilot (working from the UK).

For the Revenue it was argued that the taxpayer was resident in the UK. The word “resident” was not defined in the 1988 Act and so should be given its natural and ordinary meaning. The taxpayer claimed that he had departed from the UK on 6 August 1997 to live outside the UK permanently and that thereafter he was not resident in the UK. He had removed the centre of his life to South Africa in 1997 and since then he had kept his visits to the UK to a minimum. He was in the UK for a temporary purpose only to rest before or after his flights. His visits to the UK were short and only on three occasions were they longer than seven days.

The Special Commissioner decided that the taxpayer was not resident or ordinarily resident in the UK as he was in the UK for temporary and occasional purposes to carry out his employment duties.

For further information, see page 43.