ECJ Supports UK PLC Against Treasury

by Ulrika Lomas, for LawAndTax-News.com, Brussels

10 April 2006

The European Court of Justice Advocate General, Leendert Adrie Geelhoed, has given an opinion in favour of the four UK companies who had claimed that corporation tax charged on dividends received from EU subsidiaries was illegal under EU free movement of capital rules.

Between 1973 and 1999, when the UK scrapped its Advanced Corporation Tax system, which allowed UK companies to pay up dividends domestically at a favourable rate, dividends from non-UK EU subsidiaries of UK companies were charged at higher rates.

Although the four companies in the present case, British American Tobacco, British Petroleum, Aegis Group and Imperial Chemical Industries, are claiming refunds of 'only' some hundreds of millions of pounds, the UK government warned during court proceedings that the total cost of an adverse ruling might be as high GBP7 billion if many companies applied for refunds, and that the ECJ should therefore reject the companies' case on the grounds that the UK's financial stability could be affected. Mr. Geelhoed denied this reasoning.

At first sight, UK plc should be having a party based on the Advocate-General's ruling (which is very likely to be confirmed by the full Court), but companies worry that the Government might react in ways which could cost them more than they will save through the ruling.

At issue is the highly complex system of 'onshore pooling' in which foreign dividends are mixed with domestic ones according to an intricate set of rules before final taxation rates are determined. An ECJ determination that dividends from the EU had to be taxed on all fours with dividends from UK subsidiaries might cause the government to increase the effective taxation of UK dividends. Alternatively, it could adopt a thorough participation exemption, something that is operated by many EU states; but the Treasury has been very reluctant to do this, fearing a long-term loss of revenue, and would probably feel forced into additionally reducing the deductability of debt interest, as well as tightening thin capitalization rules.

Whatever the Treasury does, it is likely to cause problems for business, which hates change almost as much as it hates paying tax. So both the CBI and the Treasury are probably hoping that the ECJ, just for once, ignores the advice of its Advocate-General.

This is unlikely; the ECJ has issued a stream of tax judgements in favour of corporations over the past year. Meanwhile, the governments themselves have been busy formulating ways in which to protect their tax income, and last June, former German Finance Minister Hans Eichel proposed the setting up of a high level committee of European tax experts to examine how EU governments can defend themselves against attacks to their revenue bases by multinational corporations in the ECJ.

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