Pirelli Cable Holding NV and others (Respondents) v. Her Majesty's Commissioners of Inland Revenue (Appellant)

A double-taxation convention which confers a tax credit by reference to domestic law does not entitle a non-resident parent to a credit for a dividend paid under a group income election. Such an election removes both liability to advance corporation tax and the corresponding domestic tax credit under the Income and Corporation Taxes Act 1988.

Reparation for unlawful denial of a group election must reflect the group’s overall fiscal loss. It must therefore take account of tax-credit benefits received by the parent which would have been unavailable under the election. Advance corporation tax was not a withholding tax prohibited by the Council Directive 90/435/EEC.

Pirelli Cable Holding NV and others v Her Majesty's Commissioners of Inland Revenue was a test case in group litigation following the decision that restricting group income elections to United Kingdom-resident parents infringed freedom of establishment.

United Kingdom subsidiaries had paid advance corporation tax on dividends to Dutch and Italian parents. The parents had received reduced tax credits under the relevant double-taxation conventions. Park J held that the parents would have retained those credits even if a group income election had been available, and that the credits could not reduce compensation: [2003] STC 250. The Court of Appeal upheld that approach: [2003] EWCA Civ 1849; [2004] STC 130.

The House considered entitlement to convention tax credits in the hypothetical election scenario, the proper assessment of compensation, and whether ACT was a prohibited withholding tax under the Council Directive 90/435/EEC.

1. Appeal allowed unanimously. Lord Nicholls gave the leading speech. Lords Hope, Scott and Walker gave concurring reasons, and Lord Brown agreed. The House set aside the relevant parts of Park J’s order and remitted the unresolved factual question whether the group would have made the elections.

2. On the election issue, the tax credit available under article 10(3)(c) of each convention was a tax credit under section 231 of the Income and Corporation Taxes Act 1988. Section 231 was subject to section 247. A group income election excluded election dividends from both the ACT charge and the entitlement to a section 231 credit. Per Lord Nicholls, the conventions had to be construed purposively in the post-Metallgesellschaft Ltd and Hoechst AG v Commissioners of Inland Revenue world. They could not place a Dutch or Italian parent in a better position than a United Kingdom parent by allowing a credit where no ACT was payable. The parents would therefore have received no convention tax credits on election dividends.

3. On compensation, Lords Nicholls, Hope and Scott held that the loss was the loss arising from denial of a joint group fiscal election. Separate corporate personality was not disregarded, but the assessment had to account for both sides of the fiscal package. The benefit of convention tax credits received by the overseas parents, which would have been unavailable had an election been made, had to be brought into account. Its value could include interest, depending on the facts.

4. Per Lord Hope and Lord Scott, ACT was a tax payable by the distributing subsidiary and was capable of set-off against its mainstream corporation tax. It was not a tax withheld from the parent’s dividend income. It therefore fell within article 7.1 and was not a withholding tax prohibited by article 5.1 of the Council Directive 90/435/EEC. The point was acte clair, so no reference was made to the European Court of Justice.

• House of Lords: Allowed the Revenue’s appeal in [2006] UKHL 4, set aside paragraphs 1 and 2 of Park J’s order, and remitted the unresolved factual issue to Park J.
• Court of Appeal: Upheld Park J’s conclusions on the election and assessment issues: [2003] EWCA Civ 1849; [2004] STC 130.
• High Court (Park J): Held that the foreign parents would have remained entitled to convention tax credits and that those credits should not reduce the subsidiaries’ compensation: [2003] STC 250.