Pirelli Cable Holding NV & Ors v Commissioners of Inland Revenue

Where a United Kingdom subsidiary paid advance corporation tax contrary to the freedom of establishment, compensation or restitution is assessed at the subsidiary level. Benefits received by overseas parent companies do not reduce the subsidiary’s recovery merely because the companies form one group. Separate corporate personality remains decisive, particularly in relation to dividends.

A double taxation agreement must be construed according to its terms. A tax credit payment to an overseas parent is not conditional on advance corporation tax having been paid or payable unless the agreement says so. The court also considered, but did not determine, whether advance corporation tax was withholding tax under the Parent and Subsidiary Directive.

Five Pirelli companies brought test claims within group litigation arising from the discriminatory United Kingdom advance corporation tax regime considered by the CJEC in Metallgesellschaft/Hoechst, [2001] STC 452. United Kingdom subsidiaries had paid advance corporation tax on dividends to parent companies resident in Italy and the Netherlands. The claimants sought compensation or restitution for sums not subsequently set off against mainstream corporation tax, and interest for sums set off later.

The Revenue argued that payments made under article 10 of the Italian and Netherlands double taxation agreements were countervailing advantages which reduced or extinguished the claims. A further issue arose under the Parent and Subsidiary Directive and the CJEC decision in Athinaiki Zithopiia v Greek State, Case C-294/99, [2001] ECR I-07697. The central issues were whether the article 10 payments would have remained payable had the dividends been paid as group income, and whether benefits received by parent companies could be set against loss suffered by subsidiaries.

1. Article 52/43 issue. The claimants succeeded. The relevant comparison under Metallgesellschaft/Hoechst, [2001] STC 452, was between the treatment of United Kingdom subsidiaries, not between groups considered as single economic units.
2. The Italian and Netherlands double taxation agreements, read with Income and Corporation Taxes Act 1988, s 788, required the article 10 payments to be determined according to the express conditions in article 10. Those conditions were satisfied whether or not the dividends had been paid as group income. The agreements contained no requirement that advance corporation tax had been paid or was payable.
3. Accordingly, the payments received by the overseas parent companies were not countervailing advantages. They would have been received even if the United Kingdom subsidiaries had paid the dividends as group income without paying advance corporation tax.
4. In any event, the companies retained separate legal personality. The statutory requirement for a joint election under s 247 was machinery governing how an election was made. It did not make parent and subsidiary a single entity for substantive purposes. Adams v Cape Industries, [1990] Ch 433, did not justify treating the companies as one. Nor did DHN v Tower Hamlets London Borough Council, [1976] 1 WLR 852, establish a general principle requiring that result; the approach in that case had been seriously questioned in Woolfson v Strathclyde Regional Council, (1978) SLT 159.
5. The alternative Revenue argument that recovery should be assessed by reference to the position of the Pirelli group as a whole was rejected. The infringement occurred at subsidiary level, and relief was not reduced by benefits enjoyed by the parent companies.
6. The court considered that the issue whether advance corporation tax was withholding tax under article 5 of the Parent and Subsidiary Directive, or excluded by article 7, raised a substantial question of Community law. Since the claimants had succeeded on the article 52/43 issue, the court did not decide it or make an immediate reference to the CJEC.