Bricom Holdings Ltd v Commissioners of Inland Revenue

A double taxation agreement may exempt interest from United Kingdom corporation tax, but that exemption does not prevent a controlled foreign company charge imposed on a conventional or notional sum rather than on the interest itself. Under Income and Corporation Taxes Act 1988 Schedule 24, the assumption that a foreign company is resident in the United Kingdom substitutes for its actual residence; it does not create dual residence. The chargeable profits are therefore calculated without reference to the agreement and may include United Kingdom-source interest as a measure. What is apportioned and taxed is the resulting notional sum, not the underlying interest.

The taxpayer, a United Kingdom-resident company, wholly owned a Netherlands subsidiary whose interest receipts were taxable in the Netherlands. The Revenue treated the subsidiary as a controlled foreign company and assessed the taxpayer under section 747(4)(a) of the Income and Corporation Taxes Act 1988.

The Special Commissioners dismissed the taxpayer’s appeal. The taxpayer appealed directly to the Court of Appeal by special leave, arguing that Article 11 of the United Kingdom-Netherlands Double Taxation Convention exempted the relevant interest from the controlled foreign company charge. The central issue was whether the statutory charge was imposed on exempt interest or on a separate notional sum.

Disposition

Millett LJ delivered the leading judgment, with which Otton LJ and Beldam LJ agreed. The appeal was dismissed with costs, and leave to appeal to the House of Lords was refused.

1. Statutory assumption. The scope of a statutory hypothesis is a question of construction informed by legislative purpose. No special rule requires a deeming provision to be construed narrowly or literally. The assumption in Schedule 24 paragraph 1(1) that a controlled foreign company is resident in the United Kingdom substitutes that assumption for the company’s actual foreign residence. It does not create dual residence. The chargeable profits must therefore be calculated without reference to the Double Taxation Convention and must include the United Kingdom-source interest.
2. Nature of the charge. The controlled foreign company provisions operate through ascertainment, apportionment and assessment. The chargeable profits are a notional amount produced by a mathematical calculation. They are not the company’s actual profits, receipts or interest. The reasoning in Hughes v Bank of New Zealand [1938] AC 366 and Strathalmond v IRC [1972] 1 WLR 1511 was distinguishable because those cases concerned actual or statutorily attributed income. IRC v Australian Mutual Provident Society [1947] AC 605, as explained in Ostime v Australian Mutual Society [1960] AC 459, supported treating the charge as one on a conventional sum.
3. Effect of the Convention. Article 11(1) exempted the interest itself from United Kingdom corporation tax. It did not prevent a separate charge under section 747(4)(a), because that charge was imposed on the notional sum calculated under the statutory scheme.
4. The Court left undecided whether the section 747 charge was corporation tax, a substantially similar tax, or exempt under section 788. Millett LJ observed that section 754(2) gave force to the taxpayer’s argument on the corporation-tax question, but preferred to leave those issues for a later decision.

• Court of Appeal (Civil Division): On 25 July 1997, dismissed the appeal with costs and refused leave to appeal to the House of Lords.
• Special Commissioners: On 3 April 1996, dismissed the taxpayer’s appeal against assessments made under section 747(4)(a) of the Income and Corporation Taxes Act 1988. The appeal to the Court of Appeal was brought directly by special leave under RSC Order 59 Rule 25.