Foreign dividends tax 'unlawful'

At the end of November Mr Justice Lancelot Henderson ruled that the country’s double tax relief system infringes EU law where dividends have been paid to the UK from EU or EEA-based companies in which the UK shareholder owned more than 10%. The decision was handed down in the franked investment income group litigation order (FII GLO).

The judgment concluded that dividends received by UK parent companies from non-resident subsidiaries should be treated in the same way as those received from UK subsidiaries.

According to Peter Cussons, a tax partner at PricewaterhouseCoopers, “This is a great judgment for the taxpayer”, adding that “the Treasury now faces one of the biggest tax repayments bills to date – with the FII GLO bill being estimated at several hundred million pounds – and probably billions.”

Thirty-five years of claims
The European Court of Justice (ECJ) ruled in 2006 that the UK could grant tax credits for dividend payments only to resident companies, but also said the advance corporation tax (ACT) regime, which operated between 1973 and 1999, was illegal under EU law because it discriminated against foreign taxpayers. The system required UK companies to pay ACT when they paid dividends to their shareholders out of foreign profits, while not requiring ACT on dividends from UK companies.

The ECJ left it to national courts to review particular situations to see if such a system is unfair in practice.

Groups that have been taxed on dividends from Europe-based companies are expected to seek refunds. Claims could go back as far as 35 years after Judge Henderson ruled time limits in common law tax claims should be disapplied. The judge said the government was wrong “to curtail the limitation period applicable to mistake claims without providing any transitional arrangements”. The maximum claims figure could be £5bn.

A statement from British American Tobacco (BAT), the principal test claimant in this litigation, said: “The tentative conclusion reached in the judgment would produce recovery of about £1.2bn for [BAT].”

If the tax authorities appeal the decision, it could take up to four years to resolve.

While the Treasury has not made any formal announcement regarding whether it will appeal the judgment, Cussons believes “there will have to be a health-check to ensure that the foreign profits exemption proposals and, in particular, any conditions attached thereto are in line with EU legislation.”