UBS AG v HM Revenue & Customs

For treaty non-discrimination purposes, taxation may be less favourably levied even where losses mean that no tax is ultimately payable. A comparison between a permanent establishment and a resident company must disregard distributions of profits to the enterprise of which the establishment forms part. The payment of a tax credit obtained under section 243 of the Income and Corporation Taxes Act 1988 is not relief from corporation tax for the purposes of section 788(3)(a). It is, however, a tax credit under section 231 within section 788(3)(d), so a treaty may confer that right on a non-resident company.

UBS AG, successor to Swiss Bank Corporation, appealed against the Special Commissioners’ dismissal of claims for tax credits under section 243 of the Income and Corporation Taxes Act 1988. The claims concerned dividends received by the appellant’s London branch during accounting periods ending in 1993, 1995 and 1996.

The Special Commissioners held that article 23(2) of the UK-Switzerland double taxation convention entitled the branch to equivalent treatment to a UK company, but that the treaty right was not incorporated by section 788(3)(a). UBS appealed that conclusion and advanced a new argument under section 788(3)(d). HMRC challenged the finding under article 23(2). The central issues were whether the branch was taxed less favourably and whether either statutory limb incorporated the treaty right.

1. Article 23(2). The appeal court agreed that taxation was less favourably levied on the branch. “Levying” taxation is a broad concept and does not require an actual liability to pay tax after losses, allowances or reliefs. The inability to invoke section 243 and obtain the related payment therefore engaged the non-discrimination provision.
2. The comparison required by article 23(2) was with a UK company carrying on the same activities, but it excluded the distribution of profits to the head office. A permanent establishment cannot pay dividends, and article 7(2) addressed attribution of profits rather than the hypothetical distribution of those profits.
3. Section 788(3)(a). The treaty right was not relief from corporation tax. Section 243 brought franked investment income into account as trading income only where losses were available under section 393(1), so no corporation tax liability was reduced. The payment was not repayment of corporation tax deducted or withheld at source. It was an anomalous financial benefit preserved from the former tax regime.
4. Section 788(3)(d). The expression “a tax credit under section 231” referred to the tax credit described in section 231(1), rather than only credits payable under sections 231(2) and (3). The expression therefore covered the credit payable under sections 242(1)(c) and 243. Section 788(3)(d) incorporated the treaty right.
5. The appeal was allowed on the new section 788(3)(d) ground.

The Special Commissioners dismissed UBS AG’s appeal from the refusal of its claims. The High Court allowed the appeal on the basis of section 788(3)(d), while rejecting the claim under section 788(3)(a).