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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:

1. HMRC response to George Anson v HMRC: Double Tax Relief by Katy Howard
2. C-89/14 A2A: Compound interest by Cristiana Bulbuc
3. 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

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:

1. EU Tax Law Group Meeting, Basel
2. The Trustees of the BT Pension Scheme v HMRC by Lucy Needle
3. Holding companies, input VAT and VAT grouping by Katy Howard

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:

1. The Trustees of the BT Pension Scheme v HMRC by Lucy Needle
2. Advocate General considers VAT treatment of Bitcoins by Katy Howard
3. Holding companies, input VAT and VAT grouping by Katy Howard

You can download the complete newsletter as a PDF here: August 2015 – Tax Newsletter

The latest decision in the test case for the Foreign Income Dividend (“FID”) and Tax Credit Group Litigation were delivered on 9 July 2015 by the Court of Appeal (“CA”), [2015] EWCA Civ 713. The decision follows appeals and cross appeals from a 2013 decision of the Upper Tribunal (“UT”), [2013] UKUT 0105 (TCC).

In the UT, the Trustees of the BT Pension Scheme (“Trustees”) were successful in establishing that the UK breached EU law by denying tax credits to UK pension funds in respect of foreign income dividends (“FID Claims”) and overseas dividends (“Manninen Claims”) paid by UK companies. HMRC were also successful however in arguing that all but one of the Trustee’s claims (for the 1997/1998 tax year) were out of time. Permission to appeal to the CA was granted to both parties to allow:

1. HMRC to attempt to overturn the Trustee’s win on the Manninen and FID claims; and
2. The Trustees to submit arguments that all of their claims were in time.

Following a two stage hearing, the CA agreed with the UT that all claims except the 1997/1998 claim were time-barred. The CA decided to refer certain questions arising in the in-time claim to the Court of Justice of the European Union (“CJEU”). The questions to be referred relate to:

1. Whether the Trustees as shareholders of the paying company have had their EU rights infringed or can rely on the infringement of the paying company’s EU rights; and
2. The nature of any relief, should the CJEU find that EU rights have been infringed.

Parties must now consider the form of such questions which are to be included in the reference to the CJEU.

This article appears in the JHA Summer 2015 Tax Newsletter, which also features:

1. EU Tax Law Group Meeting, Basel
2. Advocate General considers VAT treatment of Bitcoins by Katy Howard
3. Holding companies, input VAT and VAT grouping by Katy Howard

You can download the complete newsletter as a PDF here: August 2015 – Tax Newsletter

The Court of Appeal dismissed appeals in Arcadia Group Brands and others v Visa Inc and others, and upheld the decision by Simon J in the High Court ([2014] EWHC 3561 (Comm)) to strike out claims for damages of around £500 million by a number of well-known high street retailers, including Asda, B&Q, Debenhams and Argos against Visa.

This case has important ramifications in respect of the limitation period for competition law damages claims and the circumstances in which indemnity costs may be awarded.

The key points in the judgment are as follows:

• The Judge had not wrongly applied the “statement of claim” test set out in Johnson v Chief Constable of Surrey Times (CA, unreported, November 23, 1992) when striking out the retailers’ claims pursuant to Section 9 of the Limitation Act 1980.
• Section 32(1)(b) of the Limitation Act 1980 is concerned with facts which relate to the prime facie case, not those which improve the prospect of success in a claim or are broadly relevant to a claimant’s case. Section 32(1)(b) is to be construed narrowly.
• Facts relevant to the issue of exemption under Article 101(3) of the Treaty on the Functioning of the European Union are not “relevant facts” and so any concealment of such facts does not stop time running.
• Notwithstanding their complexity, competition law damages claims do not fall within an exceptional category calling for a different approach to the application of Section 32(1)(b).
• A six-year limitation period for competition law claims, with the benefit of Section 32(1)(b) postponement, is not incompatible with the EU principle of effectiveness. The recently enacted Damages Directive has no application to the present case and does not merely give effect to the existing law. The EU law position is clear and there is no basis for a reference to the Court of Justice of the European Communities.
• The Judge has a wide discretion regarding costs. However, in this instance, he had erred in awarding costs on the indemnity basis. The weakness of a legal argument is not a justification for an order for indemnity costs, which is penal in nature. The position might be different if proceedings or steps taken within them are not only based on a clearly hopeless case, but are also driven by an ulterior commercial or personal motive, or for a tactical purpose unrelated to a real belief in the merits of the case. Consequently, the Court of Appeal allowed the retailers’ appeal against the costs order.

[Arcadia Group Brands and others v Visa Inc and others [2015] EWCA Civ 883]

The Court of Appeal voiced significant reservations about the correctness of the decision in Al-Skeini v United Kingdom (55721/07) (2011) 53 E.H.R.R. 18, which extended the European Convention on Human Rights (ECHR) to the battlefield. Nevertheless, this case authority was binding and therefore followed. The Secretary of State’s appeal failed. Serdar Mohammed’s (Mohammed) cross-appeal regarding the defence of act of state succeeded and he was entitled to compensation.

This case considers important points about (i) the territorial application of the ECHR and its relationship to international humanitarian law; (ii) the consequences of failing to provide procedural safeguards required by Article 5 (right to liberty and security of person) of the ECHR; and (iii) the principles of the defence of act of state and when the defence is available.

Key points arising out of the appeal are:

• The Secretary of State had failed to make appropriate and lawful arrangements for the deployment of UK armed forces to Afghanistan and for the capture of those who posed a threat. There had been no means of enabling detention exceeding 96 hours. The actions of the UK armed forces in detaining Mohammed for longer than that were not attributable to International Security Assistance Force (ISAF).
• There had been no authority for extended detention under any of the three bases advanced by the Secretary of State. He had not put in place procedural safeguards agreed under international law to be appropriate for a non-international armed conflict and he had therefore engaged in the arbitrary detention of Mohammed, which was contrary to Article 5 of the ECHR.
• The detention was also unlawful under Afghan law, and the defence of act of state would not apply to any private law claim in tort made under Afghan law because the claim was justiciable and no rule of public policy prevented domestic Courts from giving effect to Afghan law as the applicable law.

In addition to the main appeal, there were conjoined Afghan detention cases raising similar issues, together with an appeal by a Pakistani citizen (R) against a decision ([2014] EWHC 3846 (QB)) that his claim concerning his 10 year detention in Iraq was barred because of the defence of act of state. The issues raised in the other Afghan cases were justiciable, but as they had brought public law proceedings rather than private law claims in tort, the second limb of the act of state principle had no application to them. The act of state principles identified in Mohammed’s claim applied equally to R’s claim. However, because the facts of his case had not been established, the instant Court was unable to determine whether the defence was available to the Secretary of State.

[(1)Serdar Mohammed & Ors (Respondents) v Secretary of State for Defence (Appellant) (2) Yunus Rahmatullah & the Iraqi Civilian (Appellants) v Ministry of Defence and Foreign Commonwealth Office (Respondent) [2015] EWCA Civ 843]

Read the full judgment here

The Court of Appeal upheld Mr Justice Field’s decision ([2013] EWHC 3494 (Comm), [2014] 1 All E.R. (Comm) 942) which set aside third party debt and receivership orders made to enforce an arbitration award against State Oil Marketing Company of the Ministry of Oil, Republic of Iraq (SOMO) and dismissed Taurus Petroleum Limited’s (Taurus) appeal.

The Court of Appeal’s ruling has important ramifications on the question of the immunity of state-owned companies worldwide and the proper limits of the English Court’s jurisdiction when foreign parties or property are involved.

Key points arising out of the judgment are:

• SOMO has a separate corporate status from the Iraqi State. The Iraqi State owned the oil, but selling it was entrusted to SOMO. This was a commercial act and not one performed in the exercise of sovereign immunity. The debts would be immune if they were the property of the Central Bank of Iraq (CBI). CBI’s contractual right to require the French bank to discharge its obligation to SOMO by making payment to the New York account was not sufficient to give it a proprietary interest in the debt or to justify regarding the debts as CBI’s property.
• A debt due under a letter of credit is situated where payment is made. Power Curber International Ltd v National Bank of Kuwait SAK ([1981] 1 W.L.R. 1233) was followed. The English Court had no jurisdiction to make a third party debt order in respect of letters of credit to be paid in New York.
• Where foreign parties or property are involved, the Court is obliged to consider the proper limits of its jurisdiction and should refrain from making an order that exceeds those limits. Masri v Consolidated Contractors International Co SAL ([2008] EWCA Civ 303, [2009] Q.B. 450) was followed. It was not appropriate to make a receivership order in this case as SOMO’s connection with the jurisdiction was tenuous, and an order would prevent CBI from obtaining the benefit of the French bank’s obligation to pay the sums due into the New York account.
• The process of opening a letter of credit is essentially mechanical. The Court should be very cautious before construing letters of credit by reference to extraneous circumstances.
• There is no reason in principle why a letter of credit could not be issued in favour of joint beneficiaries.
• There is no principle limiting the scope of third party debt orders to debts with which the judgment debtor could honestly deal, otherwise than by reference to the existence of proprietary interests.

[Taurus Petroleum Limited v State Oil Marketing Company of the Ministry of Oil, Republic of Iraq ([2015] EWCA Civ 835)]

The Court of Appeal ruled that making a UK Court Order for interim maintenance payment does not unlawfully circumvent prohibitions in Ukrainian Sanctions Legislation and the appeal was dismissed.

This appeal raises a short but important point of law about whether the Court can make an Order for payment by a husband in favour of his former wife of interim maintenance into an account in Russia with a Russian bank. Both husband and wife are Russian citizens: the husband lives in Russia and the wife lives in the UK. The Order of Moor J dated 17 October 2014 (the subject of this appeal) provides for maintenance payment by the husband into the wife’s account in a Russian bank in Russia. As the wife lives in the UK, clearly she will remit those monies to the UK. The husband is subject to sanctions imposed by Council Regulation (EU) No 269/2014 (the EU Regulation). The primary effect of the EU Regulation is that his assets are “frozen” in the EU which means no one can “deal” with them in the EU and a person within the EU cannot participate in his dealing with them: it is that primary effect which gives rise to the issue on this appeal.

In most respects the EU Regulation is directly enforceable. However, certain matters require domestic regulations and in the case of the UK these are the Ukraine (European Union Financial Sanctions) (No 2) Regulations 2014 (2014 No. 693), (the UK Regulations). The EU Regulation has primacy over the UK Regulations.

The EU Regulation requires each member to nominate a “competent authority”, which is able to give releases in certain circumstances. HM Treasury is the competent authority nominated by the UK. HM Treasury confirmed that the EU Regulation did not prevent the husband from transferring money in Russia into her Russian account and that the wife was free to transfer money from her Russian account to the UK.

The husband submitted that it was not open to the Court to make an Order for interim maintenance in Russia. The UK Regulations did not contain any provision enabling him to do so. This was rejected by Mr Justice Moor.

The appeal upheld Moor J’s decision, citing two relevant guiding principles:

(1) Each set of Regulations must be construed as a consistent whole and which enables all the Articles or Regulations in question to have effect.

• The basic premise of Article 5 of the EU Regulation is that there can be a valid Court Order, even if it deals with funds, because otherwise it would be pointless for that Regulation to empower the competent authority to authorise the use of frozen funds to meet it.
• The UK Regulations do not transpose Article 11.
• Even if HM Treasury did not give a licence in a particular case, the person entitled to the Court Order would be entitled to enforce it when sanctions came to an end. It would be disproportionate for the EU legislature to invalidate the Court Order and therefore deprive him of that possibility.

(2) Both sets of Regulations should so far as possible be construed consistently with the EU fundamental right to effective judicial protection.

• The right to effective judicial protection includes the right of access to Court. It would be contrary to the wife’s fundamental right of access to Court to prevent her from obtaining the valid and effective decision of the Court in a Member State as to the maintenance to which she was entitled, unless that right was clearly taken away by the EU Regulation.
• The making of a Court Order would only circumvent the EU Regulation for the purposes of Article 9 if the Order itself contained provisions which dealt with funds or economic resources and which were also intended to achieve a dealing with funds or economic resources within the scope of the EU Regulation without the licence of HM Treasury.
• The competent authority can only authorise the use of funds or economic resources of a designated person if certain conditions are met. Where a Court Order has been made, the relevant condition is that the funds are “subject to” the Court Order.
• There is no breach of Article 9 of the EU Regulation or Regulation 10(2)(a) of the UK Regulations as a result of Moor J’s Order. There cannot be a circumvention of a measure by adopting a means which the EU Regulation permits.

[R and R [2015] EWCA Civ 796]

The CJEU has once again had to consider a holding company’s right to deduct VAT. In a case to which the Sixth VAT Directive – as opposed to the more recent VAT Directive – was relevant, the referring German court was in doubt about how to apportion input VAT paid by a holding company for the acquisition of capital intended for the purchase of shares between the economic and non-economic activities of that company. First of all, the Court recalled the principles arising from its case-law on this topic, namely:

(1) A holding company whose sole purpose is to acquire shares in other undertakings and which does not involve itself directly or indirectly in the management of those undertakings, without prejudice to its rights as a shareholder, does not have either the status of taxable person or the right to deduct tax.

(2) The mere acquisition and holding of shares in a company is not to be regarded as an economic activity conferring on the holder the status of a taxable person. The mere acquisition of financial holdings in other undertakings does not amount to the exploitation of property for the purpose of obtaining income therefore on a continuing basis because any dividend yielded by that holding is merely the result of ownership of the property.

(3) However, it is otherwise where the holding is accompanied by direct or indirect involvement in the management of the companies in which the holding has been acquired and the involvement of a holding company in the management of companies in which it has acquired a shareholding constitutes an economic activity where it entails carrying out transactions which are subject to VAT, e.g. the supply of administrative, financial, commercial and technical services.

The right to deduct input tax arises even where there is no direct and immediate link between a particular input transaction and output transactions giving rise to the right to deduct, where the costs of the services in question are part of a taxable person’s general costs and are, as such, cost components of the taxable person’s supplies. The rules in Article 17(5) of the Sixth Directive provide for methods of deduction where input transactions are used to carry out both economic transactions which give rise to a right to deduct and those which do not. However, the determination of the methods and criteria for apportioning input tax between economic and non-economic activities – referred to in the UK as business and non-business activities – is in the discretion of the Member States who must, within that discretion, provide for a method of calculation which objectively reflects the part of the input expenditure actually to be attributed to those two types of activity. It was for the national courts to establish whether the Member State had had regard to the aims and broad logic of the Sixth Directive and had provided for such a method of calculation.

The CJEU also found that the Sixth VAT Directive precluded national legislation which reserved the right to form a VAT group solely to entities with legal personality and linked to the controlling company of that group in a relationship of subordination, except where those requirements were “appropriate and necessary in order to achieve the objectives seeking to prevent abusive practices or behaviour or to combat tax evasion or tax avoidance”, which were matters for the national court to determine. However, the relevant provision, Article 4(4) did not satisfy the criteria allowing taxable persons to claim direct effect (i.e., to claim the benefit of the provision in the event that their Member State’s legislation was not compatible with that provision and could not be interpreted in a way compatible with it).

[Beteiligungsgesellschaft Larentia + Minerva mbH & Co. KG v Finanzamt Nordenham (C-108/14); Finanzamt Hamburg-Mitte v Marenave Schiffahrts AG (C-109/14)]