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  3. ECJ Ruling A Mixed Blessing For UK-Based Corporates

ECJ Ruling A Mixed Blessing For UK-Based Corporates

by Robert Lee,, London

13 December 2006

A ruling by the European Court of Justice has left the United Kingdom government open to potentially billions of pounds in tax repayments to companies, but has also added yet more complexity to the UK's already burdensome corporate tax system, according to accounting firm KPMG.

The EJC ruling on the FII (franked investment income) case covered two key issues: the legality of advance corporate tax payments made prior to the tax’s abolition in 1999 and the tax treatment of foreign sourced dividend income from subsidiaries of UK parent companies located in other EU member states.

As was expected the ECJ followed an earlier Advocate General opinion by ruling that ACT operated illegally between 1973, when the UK acceded to the EU, and 1999, giving rise to the prospect of substantial rebates to companies which have paid this tax in the past.

The Treasury has warned that such a ruling could leave it open to repay claims totalling GBP9 billion, although draft blocking legislation which would limit a company's claims to six years would reduce this to about GBP2 billion, the government has estimated. However, this legislation itself is to be challenged in the courts, and while accountants say that the ECJ's decision is a boost for companies, the full consequences won't be known until the next legal battle is resolved.

“In principle, today’s decision is good news for companies hoping for an ACT rebate. However, they are unlikely to receive anything until the UK and European courts reach a decision as to the legal status of the blocking legislation – a process that is likely to take some time," observed Jonathan Bridges of KPMG’s EU law group.

The ECJ's decision on the tax treatment of resident and non-resident dividend pavements is also a mixed blessing, says KPMG. While the court accepted in principle that foreign sourced dividends should not suffer more UK tax than UK-sourced dividends, it went on to hold that existing measures to compensate for this discriminatory treatment by way of tax credits to relieve double taxation on foreign sourced dividends were adequate.

The Court has referred the matter back to the UK courts to determine whether the UK rules operate to achieve this parity.

“It is disappointing that the ECJ has stopped short of ruling that the UK should apply the same rules to both UK and foreign sourced dividends," Bridges noted.

He continued: “Achieving equality of treatment via a credit system may, on the face of it, sound reasonable but it is not straightforward."

"The ECJ’s ruling today fails to fully appreciate the fact that not all profits in the UK are taxed at the corporate tax rate of 30%. For example those deriving from share sales are completely exempt."

Bridges concluded:

"What today’s ruling does is potentially introduce yet another layer of complexity into the UK’s already overly cumbersome corporate tax system.”

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