With immediate effect from 26 October 2015 the Government introduced a new special 45% corporation tax charge. No public announcement was made and the new charge was introduced at the very last stage of the Finance Bill’s progress through the Commons. The charge is now embodied in section 38 of Finance (No.2) Act 2015. The new tax bites only on compensation payable by HMRC calculated by reference to a non-statutory interest rate. This ear-marks any compensation arising from the current High Court claims seeking restitution for breaches of EU law in the FII and CFC and Dividend GLOs, the claim for compound interest in Littlewoods and the cases following it. It impacts both the interest component and any “time value” principal (i.e. for utilised/repaid ACT, CT or VAT) which represent the vast majority of the value of these claims. No other claims seem capable of being affected.
The new special tax is also ring-fenced from the application of reliefs so that it must be paid in cash. The tax will be withheld from any payment after 26 October whether as a settlement, judgment, summary judgment or interim payment.
Cunningly, the tax is designed not to exist until the very end of all appeal stages in the case concerned (even though withheld at source) but will then take effect in the accounting period in which the receipt was recognized in P&L in accordance with GAAP. The absence of a tax charge to challenge until each case ultimately concludes could have the co-incidental effect of prolonging the litigation yet further. It will be recalled that in July provisions reduced the interest rate on unpaid judgment debts owed by HMRC to a rate below the government’s cost of borrowing. That reduced rate would appear designed to apply to the withheld tax.
In some circumstances (where IAS 12 has been applied for payments received before the enactment of this tax) the effect will be that a tax which does not yet exist may be created in the future to apply to accounting periods already in the past.
This represents the 6th bout of retrospective legislation impeding these EU claims. Earlier attempts to cancel claims or retrospectively render them out of time on 8 September and 20 November 2003 (s320 FA 03) and 6 December 2007 (s107 FA 07) have already considerably extended the litigation although ultimately found to be unlawful. The lawfulness and impact of the fourth attempt (the removal of interim payments) on 26 June 2013 (s234 FA 13) is current being considered by the Court.
Challenging the new 45% tax
JHA has issued one Judicial Review already challenging the lawfulness of the new measures under EU and ECHR law. Another is planned to be issued shortly. Expedition has been sought. The first step is for the Court to determine whether these applications should be granted permission to proceed. We expect a decision on this during December. In addition a variety of applications have been issued in the FII GLO seeking the payment of judgments (including potential judgments) without deduction of withholding tax on the grounds that it is unlawful. We will report on developments.
This article appears in the JHA November 2015 Tax Newsletter, which also features:
The Finance Bill 2015 includes a new amendment which would see the imposition of a 45% corporation tax charge on restitution interest paid to companies by HMRC. The charge specifically applies to restitution interest the calculation of which is not limited to simple interest at the statutory rate. The novelty of this proposed charge is found in the fact that it creates an entirely new ring-fenced system of taxation with a significantly higher corporation tax rate. The proposed charge will apply to interest either agreed between HMRC and companies or interest awarded in a final judgment by a court. The tax will be applied in the year of income where, in accordance with GAAP, the interest was recorded (or ought to have been recorded) in the company’s accounts. It will be retained at source (withholding tax) by HMRC when making the payment of the restitution interest to the company.
The measures will take effect upon the Bill being given Royal Assent (although certain anti-avoidance measures take effect from 21 October 2015).
Following the Ukrainian authorities’ failed attempt to intervene in President Yanukovych’s application to the General Court of the EU for sanctions to be lifted, that Court has ruled that Ukraine must pay President Yanukovych’s legal costs.
President Yanukovych started proceedings for the annulment of sanctions in May 2014.
Four months later the Ukrainian authorities applied to the General Court of the EU for permission to intervene in the annulment case. President Yanukovych opposed that application. Subsequently in December 2014 the Ukrainian authorities informed the Court that they were withdrawing their application.
Following an application made by President Yanukovych’s legal team, the General Court ruled in March 2015 that Ukraine must pay the costs incurred by President Yanukovych opposing the Ukrainian authorities’ attempt to intervene in the annulment proceedings.
The General Court’s ruling has only now been made public (see link here).
President Yanukovych’s annulment proceedings are continuing before the General Court.
Joe Hage of Joseph Hage Aaronson LLP, President Yanukovych’s UK lawyer, said:
“This is an important ruling. President Yanukovych is challenging sanctions which were imposed by the EU on the basis of false criminal allegations made by the Ukraine regime, which he vigorously denies. The Ukraine regime’s attempt to intervene in the EU sanctions proceedings was politically motivated and misguided. President Yanukovych was right to resist this, and now Ukraine must pay his legal costs.
We continue to move forward with our application to have the sanctions against President Yanukovych annulled”.
END
Re Familienprivatstiftung Eisenstadt concerned the Austrian system of Interim Tax (IT) imposed on resident Private Foundations (PFs). IT applied to all PFs making gifts from certain categories of income to beneficiaries whether resident or non-resident in Austria. However, for the purposes of computing the taxable amount of IT, Austrian tax legislation permitted a deduction for payments made to all beneficiaries save for an important category of persons – beneficiaries resident in jurisdictions which have concluded an OECD Model Double Tax Treaty (DTT) with Austria (in which case Austria did not have the right to tax the gifts granted to those beneficiaries as per the Other Income Article).
The CJEU found that the gifts made by the PF fell within the scope of the free movement of capital such that (current) TFEU, Art 63(1) was engaged. The IT regime was held to restrict the free movement of capital as PFs making payments to resident beneficiaries will, all other things being equal, always have greater financial means at its disposal. Further, the IT serves as a material disincentive for the founder of the PF and the PF itself if there are non-resident beneficiaries in jurisdictions which have concluded a DTT with Austria. Further, the calculation of the IT was capable of resulting in a disadvantage in terms of cash-flow in a cross-border scenario as opposed to in a domestic scenario.
The free movement of capital may be legitimately restricted where, as per TFEU Art 65(1)(a), the taxpayers are not in the same situation with regards to their place of residence. It was noted that the PF which made gifts to a resident beneficiary was in a comparable situation to a PF which made gifts to non-resident beneficiaries as, in both cases, the PF made gifts from its assets or increases in such assets. Interestingly, the court added that the renunciation by Austria of its taxing jurisdiction over the capital gains (of Austrian-source gifts) to non-residents (by way of a DTT) meant that Austria was precluded from invoking the differences in taxability of the two groups of PFs (those which made gifts to residents and those which made gifts to non-resident beneficiaries resident in a DTT jurisdiction).
As reported in our July 2015 newsletter, in George Anson v HMRC the Supreme Court found that the denial of a double taxation relief (“DTR”) claim made by Mr. Anson, a member of a Delaware Limited Liability Company (“LLC”), violated article 23(2)(a) of the UK-US Double Taxation Convention. HMRC had argued that what Mr. Anson received was a distribution from the LLC and no DTR was due because the US tax was charged on a share of the profit rather than on a distribution of it. The Supreme Court found, agreeing with the First-tier Tribunal (“FTT”), that the profits of the LLC belonged to the members as they arose and therefore belonged to Mr. Anson when it was taxed in the US. Consequently his claim to double tax relief was well-founded.
HMRC have now issued Revenue and Customs Brief 15 (2015) as their response to the Supreme Court’s decision. HMRC believe the case can be distinguished on its facts and intend to carry on applying their previous approach where appropriate. No details are provided of the type of facts which would distinguish the Anson case from others.This article appears in the JHA September 2015 Tax Newsletter, which also features:
C-89/14 A2A: Compound interest by Cristiana Bulbuc
C-386/14 Groupe Steria: Dividend Tax by Alessia Riposi
C-10/14, C-14/14 and C-17/14 Miljoen: Withholding Tax by Alice McDonald
You can download the complete newsletter as a PDF here: September 2015 – Tax Newsletter
On 17 September 2015 the CJEU handed down judgment in three joined cases concerning the interpretation of Art 63 TFEU (free movement of capital) in the context of Dutch withholding tax legislation. The legislation in question imposed a withholding tax on dividends distributed by a resident company to both resident and non-resident taxpayers. It contained a mechanism by which resident taxpayers could offset the withheld tax against their income tax or corporation tax. However for non-resident taxpayers the tax paid was a final tax.
The Court confirmed that, for companies, relevant factors when comparing the tax burdens of resident and non-resident taxpayers include taking into account expenses which are directly linked to the actual payment of dividends. It held that if, after taking relevant factors into account, the referring court found that the legislation resulted in a higher tax burden to non-resident taxpayers, this would be liable to deter non-resident taxpayers from investing in resident companies and would constitute a restriction on the free movement of capital.
The CJEU held that the difference in treatment could not be justified by a relevant difference in the situations of resident and non-resident taxpayers. Neither could the restriction on Art 63 TFEU be justified by the application of a double taxation convention.
This article appears in the JHA September 2015 Tax Newsletter, which also features:
You can download the complete newsletter as a PDF here: September 2015 – Tax Newsletter
ASM Brescia and AEM, which merged to create the company A2A, benefitted from a three year exemption from corporation tax and subsidised loans granted by Italy. In 2002, the Commission considered that those tax exemptions constituted state aid incompatible with the common market and ordered Italy to recover the aid. In 2008, Italy took the necessary measures to recover the aid in question and provided in its legislation that, by reference to an EU regulation (not yet applicable on the date the recovery of the aid was ordered by the Commission), the amounts to recover would be subject to compound interest.
A2A contested the basis of calculation of interest before the Italian courts. The Italian Court of Cassation asked the CJEU whether the Italian legislation could provide for compound interest by reference to a regulation which was not yet applicable on the date recovery of the aid was ordered by the Commission.
The CJEU held that the Italian legislation did not have retroactive effect as the aid had not even been assessed at the time of its introduction. More interestingly the CJEU endorsed the provision of compound interest observing that “the application of compound interest is a particularly appropriate means of neutralising the competitive advantage granted unlawfully to undertakings benefitting from that State aid.”
While not directly on point for claimants seeking compound interest on the recovery of CT and VAT charged contrary to EU law, it is helpful to see the CJEU endorsing a compounding approach as a “particularly appropriate means” to recompense breaches of EU law.
This article appears in the JHA September 2015 Tax Newsletter, which also features:
HMRC response to George Anson v HMRC: Double Tax Relief by Katy Howard
C-386/14 Groupe Steria: Dividend Tax by Alessia Riposi
C-10/14, C-14/14 and C-17/14 Miljoen: Withholding Tax by Alice McDonald
You can download the complete newsletter as a PDF here: September 2015 – Tax Newsletter
Case C-386/14 Groupe Steria concerned French legislation which provided for the differential taxation of dividends received by parent companies of a tax-integrated group, depending on where their subsidiaries were established. Where dividends came from companies belonging to a tax-integrated group, any costs and expenses could be deducted from the profits, so that the dividends were not subject to tax. However it was only possible for French-established companies to belong to such a group. Therefore parent companies receiving dividends from subsidiaries established in other Member States would not be able to benefit from the deduction mechanism, and would be subject to 5% tax. The Applicant was a parent company with holdings in subsidiaries established in France and other Member States.
The Court found that the French legislation disadvantaged parent companies with subsidiaries established in other Member States and, consequently, was liable to make it less attractive for those companies to set up subsidiaries in other Member States. There was no overriding reason in the general interest which justified such treatment. The legislation therefore breached Art 49 TFEU. This case is interesting for the Court’s detailed analysis of recent case law in this area concerning the interpretation of what may constitute an overriding reason in the general interest. The Court’s reasoning was also partly based upon settled case-law, including C-446/04 Test Claimants in the FII Group Litigation, for the proposition that Member States may only exercise decisions in relation to the preventing or mitigating the imposition of charges to tax or economic double taxation in compliance with the fundamental provisions of the TFEU.
This article appears in the JHA September 2015 Tax Newsletter, which also features:
You can download the complete newsletter as a PDF here: September 2015 – Tax Newsletter
David Hedqvist intended to buy and sell Bitcoins, a virtual currency, in exchange for Swedish Krona. Before commencing this activity he sought a preliminary opinion from the Swedish Tax Law Committee as to whether he would need to account for VAT. The preliminary opinion evaluated the activity as a supply of services for consideration, but a supply of services which was exempt from VAT, since Bitcoins are a method of payment that are used like legal tender. The Swedish tax authorities appealed this ruling and the Swedish Supreme Administrative Court referred two questions to the Court of Justice of the European Union.
Advocate General Kokott has now opined on this matter, as follows:
Even where a pure means of payment was not guaranteed and regulated, from a VAT perspective it fulfilled the same function as legal tender and in principle was therefore to be treated the same on the basis of the principal of fiscal neutrality. This meant that the case of First National Bank of Chicago (C-172/96) EU:C:1887:354 was applicable. Therefore, the exchange of a pure means of payment for legal tender and vice versa, which is effected for consideration added by the supplier when the exchange rates are determined, is the supply of a service effected for consideration within the meaning of Article 2(1)(c) of the VAT Directive.
Such transactions are exempt under Article 135(1)(e) of the VAT Directive (“transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest”). Article 135(1)(f) (“transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities referred to in Article 15(2)”) was not applicable.
The judgment of the Court will follow in due course. Although the Court often follows the Advocate General’s opinion, this is not invariably the case.
At the time of writing the Advocate General’s opinion was not available in English, but other language versions are available on the link below.
Skatteverket v David Hedqvist (C-264/14)
This article appears in the JHA Summer 2015 Tax Newsletter, which also features:
You can download the complete newsletter as a PDF here: August 2015 – Tax Newsletter
JHA is a member of the EU Tax Law Group, a network of independent EU tax lawyers specialising in EU tax law.
The EU Tax Law Group will be holding a free seminar at this year’s IFA Congress in Basel, Switzerland, covering topics such as the new EU GAAR, new EU Anti-hybrid instruments provisions, Patent boxes, new EU exchange of tax rulings rules, the re-launch of Corporate Tax harmonization, pending EU cases and more.
The seminar will run from 14.30 to 18.00 on 1 September 2015. For more information please visit www.actl.uva.
For more information please visit www.actl.uva.nl, or alternatively contact us to reserve a place.
This article appears in the JHA Summer 2015 Tax Newsletter, which also features:
You can download the complete newsletter as a PDF here: August 2015 – Tax Newsletter
