Skatteforvaltningen v Solo Capital Partners LLP

The foreign revenue rule bars direct or indirect claims for tax which is due but unpaid. It does not bar an ordinary private law claim by a foreign tax authority to recover money obtained from its general funds by fraud where no tax was ever due from the defendants.

The wider sovereign powers rule applies where the claim involves the exercise or assertion of a sovereign right. A claim which could equally be brought by a private person, including a claim for reparation as the victim of fraud, falls outside that rule. The court may recognise and examine foreign revenue legislation without enforcing it.

The Danish tax authority sought about £1.44 billion from numerous defendants. It alleged that fraudulent applications had induced it to pay withholding-tax refunds to entities which had never owned the relevant shares, received dividends or paid the tax supposedly refunded. Claims against ED&F Man were based on negligent rather than fraudulent misrepresentation.

Andrew Baker J held in [2021] EWHC 974 (Comm) that all claims were inadmissible under Dicey Rule 3 as indirect enforcement of Danish revenue law. The authority appealed. The principal issue was whether claims to recover money obtained through fraudulent refund applications enforced a foreign revenue law or asserted sovereign authority. A further issue concerned Article 1(1) of the Brussels Recast Regulation.

1. The appeal succeeded on Ground 1 in respect of the alleged fraud defendants. The narrow revenue rule prohibits direct or indirect enforcement of tax which is due but unpaid. An unsatisfied tax claim is an essential feature of that rule. The applicants had never owned the relevant shares, received dividends or paid withholding tax. The supposed refunds were therefore not refunds of tax but money abstracted from the authority’s general funds by fraud. The claims were not claims for unpaid tax: paras [126]–[128], [143].
2. The wider sovereign powers rule also did not apply. The decisive question is whether bringing the claim involves an act of sovereign character, the exercise or assertion of a sovereign right, or the vindication of a sovereign act. The authority was seeking reparation as the victim of fraud in the same way as a private person. Even if approving and paying refunds could be described as sovereign acts, a claim which sought to invalidate their fraudulent procurement did not vindicate those acts: paras [129]–[137].
3. The defendants had confused the mechanism of the alleged fraud with the character of the resulting claim. Examination of the Danish withholding-tax regime at a later trial would amount to permissible recognition of foreign revenue law. It would not convert the claim into enforcement of that law or an assertion of sovereign authority: paras [137]–[142]. Fraudulent use of the tax system did not create a taxpayer-tax authority relationship where no tax had ever been paid or owed.
4. The court did not decide whether the same analysis governed negligent misrepresentation or mistake because Ground 1 was not pursued against ED&F Man. It observed that there was substantial support for treating a refund obtained by non-fraudulent misrepresentation in the same way: paras [144]–[145].
5. The court also left the proposed public-policy exception undecided. It nevertheless approved, as an obiter view, the proposition that a public-policy exception exists in relation to the wider sovereign powers rule and considered that an alleged major international fraud might provide a powerful case for its application: para [146].
6. The claims against ED&F Man remained inadmissible. Given the unchallenged application of Dicey Rule 3 to those claims, their basis was necessarily a right or legal relationship characterised by the exercise of public powers. They were therefore a revenue matter outside Article 1(1) of the Brussels Recast Regulation. The contrary conclusion below was inconsistent with the binding ratio of QRS v Frandsen: paras [147]–[153]. Ground 2 was consequently academic.

1. Court of Appeal (Civil Division): In [2022] EWCA Civ 234, allowed Ground 1 concerning the alleged fraud defendants. Their claims were not barred by Dicey Rule 3. The claims against ED&F Man remained inadmissible, and Ground 2 was academic.
2. High Court, Commercial Court: Andrew Baker J in [2021] EWHC 974 (Comm) held that all the claims were inadmissible under Dicey Rule 3 as indirect enforcement of Danish revenue law.