Pirelli Cable Holding NV & Ors v Inland Revenue

A tax credit conferred on a non-resident company by a double taxation agreement remains available according to the agreement’s conditions, even where domestic legislation would exclude the relevant dividend from the ordinary credit regime. Under the Income and Corporation Taxes Act 1988, s. 788(3)(d) gives effect to that result. Section 247(2) does not qualify the treaty entitlement. A joint group income election by parent and subsidiary is a machinery provision and does not make them one entity for restitution or damages. The primary Community-law remedy is full restitution to the taxpayer, subject to any applicable narrow exception. A withholding-tax issue unnecessary to the result was not acte clair and could be referred if it became material.

The Commissioners of Inland Revenue appealed from an order made by Park J. on 22 January 2003 in the first test claim under a Group Litigation Order. The Pirelli parents were resident in the Netherlands or Italy, while the relevant subsidiaries were resident in the United Kingdom.

The Commissioners conceded that the subsidiaries should have been able to make group income elections under s. 247 of the Income and Corporation Taxes Act 1988. The central dispute was whether the Article 10 payments made under the Netherlands and Italy double taxation agreements were available even if dividends had been paid under elections without advance corporation tax. If so, the court had to consider whether those payments reduced the subsidiaries’ restitution or damages claims. A further issue concerned whether advance corporation tax was withholding tax under Article 5(1) of Council Directive 90/435.

Park J. rejected the Commissioners’ arguments on the Article 43 issue and considered that the Directive issue would require a reference if it became material.

The Court of Appeal, in a judgment given by Peter Gibson LJ for the court, dismissed the appeal.

1. Election issue. Section 788 of the Income and Corporation Taxes Act 1988 gives effect to double taxation agreements notwithstanding domestic enactments. Section 788(3)(d) permits an agreement to confer on a non-resident person a tax credit under s. 231 in respect of qualifying distributions made by a UK-resident company.
2. The detailed provisions of the Netherlands and Italy agreements prescribe the conditions, amount and payment of the relevant credit. They are intended to be exhaustive for that purpose. The reference to a credit under s. 231 does not import every domestic qualification affecting the ordinary UK credit regime. Section 247(2), which excludes election dividends from ss. 14(1) and 231 and from franked investment income, therefore does not remove the treaty entitlement. The Pirelli parents would have remained entitled to the Article 10 payments if the dividends had been paid under group income elections without ACT.
3. Assessment issue. The court did not need to decide whether the Article 10 payments reduced the subsidiaries’ claims, because the Commissioners failed on the election issue. It nevertheless held that the joint nature of a s. 247(1) election was merely machinery. It did not justify treating parent and subsidiary as a single entity. The single economic unit concept is extremely limited, and the fundamental rule of separate corporate personality remains applicable: Adams v Cape Industries [1990] Ch. 433, Ord v Belhaven Pubs Ltd. [1998] 2 BCLC 447 and Salomon v Salomon [1897] AC 22. The court further stated that, subject to a narrow exception not applicable here, a countervailing advantage obtained by a related person is not a defence to a breach of a fundamental Community-law freedom.
4. Withholding tax issue. The question whether ACT was withholding tax within Article 5(1) of Council Directive 90/435, and whether Article 7 applied, was not acte clair. If it became material, a reference to the Court of Justice of the European Communities would be appropriate.

Costs were reserved generally pending the costs hearing before Park J. Permission to appeal to the House of Lords was refused.

• Court of Appeal (Civil Division): Appeal dismissed; costs reserved and permission to appeal to the House of Lords refused. [2003] EWCA Civ 1849
• High Court of Justice, Chancery Division: Park J., by order dated 22 January 2003, rejected the Commissioners’ arguments concerning the Article 10 payments and indicated that the Directive issue would require a reference if it became material.