MEMEC Plc v Inland Revenue

For UK tax purposes, a foreign silent partnership is not transparent merely because the partner’s return is calculated by reference to the owner’s profits. The court must examine the legal characteristics and rights created by the arrangement. Transparency requires features substantially equivalent to those of an English or Scottish partnership, including participation in the business and an interest in its assets or profits. A silent partner with only a contractual entitlement to a share of the owner’s profits does not receive the underlying subsidiaries’ dividends.

“Dividends” in Article XVIII of the convention has the meaning supplied by Article II(3), not the wider definition in Article VI(4). In Part XVIII of the Income and Corporation Taxes Act 1988, “dividend” bears its ordinary UK meaning. Sections 790, 800 and 801 therefore did not permit credit for the subsidiaries’ trade tax.

Memec Plc, a UK-resident company, owned German companies through Memec GmbH. It entered into a German silent partnership with GmbH, under which Plc contributed capital and became entitled to 87.4% of GmbH’s profits. The arrangement reduced German corporation tax but left trade tax payable by the German subsidiaries.

Plc sought UK credit for that trade tax under the UK-Germany double taxation convention and, alternatively, under Part XVIII of the Income and Corporation Taxes Act 1970 and the Income and Corporation Taxes Act 1988. The Special Commissioner dismissed the claims. Robert Walker J dismissed Plc’s appeal on 24 October 1996, although he accepted one argument concerning the meaning of “dividends” in Article XVIII.

The central issues were whether the silent partnership was tax-transparent, whether its profit share was a dividend under Article XVIII, and whether it was a dividend for the purposes of Part XVIII of the 1988 Act.

1. Appeal dismissed. The silent partnership was not transparent for UK corporation tax purposes. The court examined the characteristics that justify treating English and Scottish partnerships as transparent: the partners’ common conduct of the business, agency or participation in its transactions, liability for business debts, and beneficial or indirect ownership of the business assets and profits. Plc had no proprietary interest in the subsidiaries’ shares or dividends, did not carry on the business with GmbH, was not liable to its creditors, and had only a contractual right to a calculated share of GmbH’s profits. The Agreement was therefore the source of Plc’s income.

2. Article XVIII of the convention did not use the definition of “dividends” in Article VI(4). Article VI(4) expressly defined the term only “as used in this article”. The absence of a definition in Article XVIII meant that Article II(3) supplied the relevant domestic-law meaning. The convention’s provisions concerning withholding tax and underlying tax served different purposes, so symmetry between Articles VI and XVIII could not justify importing the wider definition.

3. In Part XVIII of the Income and Corporation Taxes Act 1988, “dividend” had its ordinary UK meaning: a payment of part of a company’s profits in respect of shares in that company. A payment under the silent partnership was unrelated to shares in GmbH, and the partnership was not a company.

4. Sections 790(6), 800 and 801 did not assist Plc. Their language presupposed a conventional dividend paid by a company to a company holding shares or voting power in the payer. Section 800 concerned different classes of share dividends, not a contractual share of profits. The court accordingly dismissed the appeal with costs and refused leave to appeal to the House of Lords.

• Court of Appeal (Civil Division): The appeal from the decision of Robert Walker J was dismissed. The judge’s decision is reported at [1996] STC 1336.
• Special Commissioner: Plc’s appeals against the Revenue’s refusal of relief were dismissed.