Until 1997 exempt taxpayers such as pension funds received a tax credit refundable in cash with the receipt of a dividend from a UK company which amounted to franked investment income (FII). However dividends received from a UK company which were from foreign sources of profits (and paid under the foreign income dividend or FID regime) did not carry any such credit. The CJEU, following the opinion of the Advocate General, has concluded that exempt shareholders should have received equivalent tax credits with FIDs. Being exempt taxpayers there was however no tax to repay. The Court has concluded that under EU law charges include any deducted amount which needs to be refunded to restore equal treatment, which for shareholders who received FIDs gives rise to an entitlement to the tax credit. It is for the UK courts to determine the procedural rules determining protection of EU rights, and those rights must not be less favourable than for similar domestic actions.
The court attached no significance to the fact that the shareholders were not subject to income tax on dividends, whether or not the breach of EU rights was significant enough to give rise to non-contractual liability on the UK, nor to the fact that the companies distributing FIDs may have increased their dividends to cover any “shortfall” caused by being unable to claim a tax credit. This did not give rise to “double recovery” on behalf of the shareholders.
This article appears in the JHA September 2017 Tax Newsletter, which also features:
