Law Lords Reject Group Advanced Corporation Tax Claim

by Robert Lee, Tax-News.com, London

10 February 2006

HM Revenue and Customs won an important legal battle this week when the House of Lords ruled that companies which claimed a tax credit on a dividend paid to a foreign parent cannot claim a refund of advanced corporation tax.

The group litigation was brought by more than 60 companies and led by Pirelli, the Italian tyre manufacturer, which claimed that the obligation to pay advance corporation tax (ACT) in the UK on dividends it paid to its Dutch parent was in breach of European Union law concerning taxes levied on dividends.

Although the Dutch parent had received a repayment of 50% of the tax credit attached to the dividend under the tax treaty between the UK and the Netherlands, it claimed that the parent's right to receive the credit was legally separate from any obligation of the subsidiary to pay ACT.

However, in overturning judgments by the High Court and the Court of Appeal, Lord Nicholls, one of the five judges on the panel, said that Pirelli was looking to obtain "the best of both worlds."

The law lords' decision was welcomed by Chris Morgan, Head of KPMG's EU Tax Group, who noted that it was a victory for "common sense."

"The decision will obviously be a relief to the Revenue. However, it is interesting because it shows how far EU law goes in modifying UK domestic legislation and treaty rights," Mr Morgan observed.

"The case demonstrates that where a claim is made under EU law it is necessary to understand all the implications. Raising an EU argument in one situation may have a knock-on effect as regards other decisions," he added.

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