Peninsular & Oriental Steam Navigation Company v HM Revenue and Customs

For double tax credit relief under the Income and Corporation Taxes Act 1988, the statutory hypotheses governing dividends from a UK subsidiary of an overseas intermediate holding company can treat UK tax as deemed underlying tax. The expression tax borne does not require actual tax to have been paid where section 801 supplies the relevant hypothesis. Group relief or other relief does not defeat the gateway. Relief remains conditional on the UK subsidiary’s dividend being represented, at least in part, in higher-level dividends reaching the UK ultimate parent. A dividend paid before the relevant receipt cannot represent it. Profits used to write down the subsidiary investment cease to be available for that purpose. The appeal therefore failed save for the portion of the dividend that demonstrably flowed through.

The appellant, a UK ultimate parent company, claimed about £21 million in unilateral double tax credit relief for a Case V dividend. Its Australian subsidiary, POAL, owned Liena, which subscribed for shares in the UK company A & G. A & G then paid Liena a lawful dividend from profits, including profits relieved by group relief. Liena largely used that receipt to write down its investment in A & G. It paid a smaller dividend to POAL, and POAL paid dividends to the appellant, including one before A & G’s payment.

The First-tier Tribunal rejected the claim, and the Upper Tribunal (Tax and Chancery Chamber), in FTC 992013, upheld HMRC’s rejection. The appeal concerned whether section 801 required actual underlying tax to have been paid and whether the dividends were higher-level dividends representing the A & G dividend.

1. Appeal dismissed save in minor part. Lady Justice Arden gave the leading judgment, with Lord Justice Jackson and Lord Justice Kitchin agreeing.
2. The statutory double tax credit code in the Income and Corporation Taxes Act 1988 had to be read as a coherent whole and in the sequence contemplated by Parliament. The statutory hypotheses in section 801 defined the relevant hypothetical facts.
3. Section 801(1) treated UK tax payable by the overseas intermediate holding company as underlying tax. Section 801(2) treated underlying tax payable by the UK subsidiary as tax paid by the overseas company, subject to the further hypothesis that the dividend was treated as one paid by an overseas company in circumstances qualifying for double tax relief. The expression tax borne in section 799 did not impose an additional requirement that actual tax had been paid. Group relief, capital allowances or other relief therefore did not prevent the section 801 gateway from operating.
4. Sections 801(4A) and 801(4B) operated successively. The mixer-cap formula was applied within the statutory hypotheses, producing an excess where appropriate. The creditable foreign tax was then increased by the appropriate portion of that excess, calculated by reference to higher-level dividends under section 806B.
5. A higher-level dividend had to represent the original UK subsidiary dividend to some extent and flow through to the UK ultimate parent. The question concerned distributable profits, not the tracing of cash. Nevertheless, once Liena used most of the A & G dividend to write down its investment, those profits no longer represented the dividend for this purpose. The First Dividend was also paid before receipt of the A & G dividend and could not represent it. Only the A$811,800 paid by Liena to POAL could potentially form the relevant numerator, subject to section 803A and the applicable calculations.

1. Court of Appeal (Civil Division) In [2016] EWCA Civ 468, the appeal was dismissed save insofar as necessary to give appropriate relief concerning the A$811,800 dividend.
2. Upper Tribunal (Tax and Chancery Chamber) In FTC 992013, the Tribunal upheld HMRC’s rejection of the appellant’s double tax credit relief claim.
3. First-tier Tribunal The Tribunal rejected the appellant’s claim, including on the tax-borne and higher-level-dividend issues.