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.”