This case concerns the availability of group relief pre-2000 between UK subsidiaries of a US holding company. The Upper Tribunal upheld the decision of the First-tier Tribunal and held that the UK group loss relief provisions pre-2000 are in breach of the non-discrimination clause (Article 24) of the UK/USA Double Tax Treaty. Irish tax legislation has materially similar provisions contained in section 401 of the Taxes Consolidation Act 1997 to the UK provisions under consideration in this case. The impact of the decision in this case on the Irish tax legislation remains to be seen.

Background

The UK law governing relief for group losses was changed in 2000 and since then it has been possible for the group relationship necessary for group relief to be traced through companies resident outside, as well as within, the UK. Before 2000, however, the position was different and a qualifying group relationship could be traced only through companies resident in the UK.

FCE was a UK-resident company, as was Ford Motor Company Limited (“FMCL”). Both FCE and FMCL were directly owned subsidiaries of a US resident company, Ford Motor Company (“FMC”). Throughout the relevant period FCE and FMCL were “75 per cent subsidiaries” of FMC and FMC would have been beneficially entitled to not less than 75% of any assets of those companies available for distribution to their equity holders on a winding-up by a liquidator. FMCL had trading losses and FCE made a claim for group relief.

The claim for group relief was refused by HMRC on the ground that the shareholding required to establish the necessary group relationship between FCE and FMCL was held by a non-UK resident company.

Issue

The issue in this case was whether the pre-2000 UK law was overridden by the non-discrimination article (Article 24) of the UK/USA Double Tax Treaty. The First-tier Tribunal held that it was, with the result that group relief was available. HMRC appealed against that decision and the case was brought before the Upper Tribunal.

The taxpayer contended that the treatment of FCE and FMCL, and the refusal to them of group relief, subjected them to taxation which was both “other” and “more burdensome” than the taxation under the group relief legislation of a UK group. The only reason for this difference of treatment was because the ownership or control of the two UK companies was held by a US resident company. HMRC argued that the sole reason for the different treatment was due to the fact that FCE and FMCL did not have a common corporate shareholder resident in the UK, and not the fact that ultimate ownership and control of those companies lay in the USA. Therefore, the discrimination did not fall within the ambit of Article 24 of the UK/USA Double Tax Treaty and accordingly there was no breach of the Article.

Decision

The Upper Tribunal, agreed with the First-tier Tribunal, and held that FCE and FMCL had been subjected to “other” or “more burdensome taxation” when compared to the taxation under the UK group relief provisions of a subsidiary of a pure UK group. The Tribunal found that the only basis for that difference in treatment was that the UK claimant company was “wholly or partly owned or controlled directly or indirectly” by a US rather than a UK resident parent company. Accordingly, the refusal of group relief was in breach of Article 24 of the UK/USA Double Tax Treaty.

The full text of the case is published on the Tribunals website at http://www.tribunals.gov.uk