Six Continents Ltd & Anor v Inland Revenue & Anor

Where a UK imputation system taxes dividends from foreign subsidiaries, EU law requires a credit by reference to the foreign nominal tax rate where the underlying commercial profits fall within the foreign tax regime but are removed from the taxable base by exemptions or adjustments. That approach preserves equivalence with the exemption system applicable to domestic dividends. Profits covered by the Dutch participation exemption, including revaluation and liquidation profits, were therefore treated as in principle subject to Dutch corporation tax for this purpose. A return of share capital from a foreign subsidiary generated no underlying taxable profits. The UK tax charge on the onward dividend was consequently compliant with EU law to that extent, and no credit was due.

Six Continents sought restitution of UK corporation tax charged under Case V of Schedule D on dividends paid between 1993 and 1997 by its wholly-owned Dutch subsidiary, Six Continents International Holdings BV. The unlawfulness of the relevant charge was accepted for most dividends following Case C-35/11, Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2013] STC 612. The remaining issues concerned the computation of the notional Dutch tax credit.

The court had to decide whether credits were due for dividends derived from revaluation adjustments, liquidation profits exempt under the Dutch participation exemption, and amounts distributed from a Dutch subsidiary’s share premium account.

1. Issues 1 and 2. Six Continents was entitled to credits at the Dutch standard rate for dividends derived from the revaluation adjustments and from the liquidation of BCF. Under Dutch law, commercial profits and benefits are first brought within the relevant profit concepts and are then removed from the taxable base by exemptions or other adjustments. The participation exemption therefore narrowed the tax base but did not mean that the underlying profits were outside the scope of Dutch corporation tax in principle.
2. This construction was supported by the structure of the Dutch Corporate Income Tax Act, the Dutch Supreme Court authorities cited by the court, and the reasoning in Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2013] STC 612. A nominal-rate credit was necessary to secure the equivalence required by EU law between the exemption and imputation systems.
3. Issue 3. No credit was due for amounts sourced from HII’s share premium account. Under the Dutch fiscal unity regime, HII and SCIH were treated as one taxable entity and the distribution was a non-event for Dutch tax purposes. There were therefore no underlying profits subject to Dutch tax. The UK charge was not discriminatory: the return of capital by a non-UK company was outside the scope of UK tax, and the onward dividend was taxable under the imputation system without a credit where no taxable underlying profits existed.
4. Issues 1 and 2 were determined in favour of Six Continents and Issue 3 in favour of the Revenue. Six Continents obtained judgment for £7,104,450, together with compound interest calculated in accordance with Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2014] EWHC 4302 (Ch), subject to applications if the relevant appellate decisions modified that calculation.

First instance decision. The judgment records that the claim arose within related group litigation and that principles from Test Claimants in the FII Group Litigation v Revenue and Customs Commissioners [2014] EWHC 4302 (Ch) were applied by agreement, subject to pending appeals.