Pirelli Cable Holdings & Ors v HM Revenue & Customs

A breach of freedom of establishment caused by premature advance corporation tax is remedied by giving the affected cross-border group the same opportunity to make a group income election as a comparable domestic group. It does not, without more, create an entitlement to a tax credit on later mainstream corporation tax.

Where a double taxation agreement links a tax credit to advance corporation tax, the absence of advance corporation tax under a group income election means that no credit arises. If the United Kingdom imposes no tax on the dividend received by a non-resident parent, Community law imposes no further duty on the United Kingdom to eliminate economic double taxation.

The Pirelli group brought compensation claims after UK subsidiaries had been denied the opportunity to make group income elections and had consequently paid advance corporation tax on dividends to parents resident in Italy and the Netherlands. The House of Lords held in the test cases that, had elections been made, the parents would not have been entitled to tax credits under the relevant double taxation agreements, and remitted the question whether the elections would hypothetically have been made.

On remittal, Rimer J held that payment of mainstream corporation tax would not generate tax-credit entitlement: [2007] EWHC 583 (Ch). The appeal concerned whether the parents nevertheless became entitled to credits once the subsidiaries later paid mainstream corporation tax.

The appeal was dismissed unanimously. Moses LJ delivered the judgment, and Jacob and Rix LJJ agreed.

1. The House of Lords’ earlier decision and remittal were premised on the consequences of a group income election. Under the statutory scheme, an election dividend is excluded from sections 14(1) and 231 by section 247(2). Through Article 3(2) of the Double Taxation Relief (Taxes on Income) (Italy) Order 1990 and section 788(3)(d) of the Income and Corporation Taxes Act 1988, the relevant treaty credit meant a credit under section 231. No advance corporation tax therefore meant no treaty credit, and section 233(1) supplied no alternative basis for UK income-tax liability.

2. The court rejected the argument that later payment of mainstream corporation tax satisfied the conditions for a treaty credit. The treaty’s quantified credit assumed payment of advance corporation tax. Its silence on group income elections could not be converted into an agreement to grant a credit whenever tax was later paid on the subsidiaries’ underlying profits.

3. Community law requires equal treatment where a Member State relieves economic double taxation for comparable domestic situations. It does not generally require the Member State of the distributing company to relieve double taxation suffered by a non-resident shareholder. Responsibility usually rests with the shareholder’s state of residence, subject to the exception where the source state exercises taxing powers over the dividend and must then provide equivalent relief.

4. The United Kingdom imposed no tax on receipt of the dividend by the Italian parent. The double taxation agreement therefore did not show that the United Kingdom had assumed responsibility for eliminating any later economic double taxation. The Article 43 obligation had been met by providing the same opportunity to make a group income election. There was no basis for disapplying or moulding sections 247 and 231 to create a credit on mainstream corporation tax.

Rimer J’s conclusion was correct, and the appeal was dismissed.

• House of Lords: In the earlier Pirelli test-case decision, [2006] UKHL 4, the court held that the non-resident parents would not have been entitled to treaty tax credits if group income elections had been made and remitted the factual election issue.
• Court of Appeal (Civil Division): [2008] EWCA Civ 70 — dismissed the appeal.
• High Court (Chancery Division): Rimer J, [2007] EWHC 583 (Ch) — held that later payment of mainstream corporation tax would not entitle the parents to tax credits.