HM Revenue & Customs v UBS AG

A double taxation convention has domestic effect only to the extent provided by Income and Corporation Taxes Act 1988, section 788. A general non-discrimination clause cannot confer a further tax-credit entitlement where the convention makes express and limited provision for tax credits in its dividends article.

A payment of a tax credit to a taxpayer with no corporation-tax liability is not relief from corporation tax in respect of income for section 788(3)(a). The statutory machinery which permits a resident company to use franked investment income against carried-forward losses does not change the substance of the non-resident permanent establishment’s claim.

UBS, a Swiss-resident bank, carried on business through a London branch which was a permanent establishment under the United Kingdom–Switzerland double taxation convention. In the relevant accounting periods it had brought-forward trading losses and received dividends from United Kingdom companies. Unlike a United Kingdom-resident corporate shareholder, it could not obtain or use associated tax credits.

The Special Commissioners dismissed UBS’s appeal. Etherton J held that the resulting discrimination was contrary to article 23(2) of the Convention and that section 788(3)(d) of the Income and Corporation Taxes Act 1988 gave the Convention domestic effect: [2006] EWHC 117 (Ch); [2006] STC 716. HMRC appealed. UBS served a respondent’s notice concerning section 788(3)(a).

The central issue was whether the non-discrimination article could secure for UBS a tax credit despite the Convention’s express provisions on dividends and tax credits.

1. Appeal allowed. Moses LJ and Arden LJ agreed that UBS was not entitled to the claimed tax credits. Sedley LJ concurred on the two grounds common to their judgments.

2. Section 788(3)(d) gives domestic effect to Convention arrangements which themselves confer a right to a tax credit under section 231. Article 10(3)(c) was the Convention’s express and limited conferral of such a right on certain Swiss-resident corporate shareholders. Article 10(5) excluded that dividends article where the holding was effectively connected with a United Kingdom permanent establishment, for which article 7 applied. Article 23(2) could not generate an additional tax-credit entitlement inconsistent with that negotiated allocation. The judge’s contrary conclusion under section 788(3)(d) was therefore wrong.

3. UBS’s claim was in substance for payment of a tax credit, not relief from corporation tax. Section 788(3)(a) concerns relief which reduces or eliminates corporation tax otherwise payable. UBS had no relevant corporation-tax liability. The treatment of franked investment income as trading income for the limited loss-relief claim under section 243 was machinery for calculating the tax-credit payment and did not convert the claim into corporation-tax relief. UBS’s respondent’s notice was dismissed.

4. No majority view was necessary on article 23(2). Moses LJ considered that withholding the credit formed part of the less favourable levying of taxation, because tax computation and entitlement to the credit formed part of the imposition of liability. Arden LJ considered that article 23(2) compared the ultimate direct tax burden, and that the associated credit did not reduce the permanent establishment’s tax charge. Sedley LJ expressed no opinion on that issue.

• Court of Appeal (Civil Division): HMRC’s appeal allowed; UBS’s claim to tax credits rejected: [2007] EWCA Civ 119.

• High Court (Chancery Division): Etherton J held that article 23(2) discrimination was given domestic effect by section 788(3)(d), while rejecting UBS’s argument under section 788(3)(a): [2006] EWHC 117 (Ch); [2006] STC 716.

• Special Commissioners: UBS’s appeal was dismissed. The Commissioners considered that the refusal of the credit was discriminatory under the Convention but that section 788(3)(a) did not provide a domestic remedy: [2005] STC (SCD) 589.