© 2025 by Michael Firth KC, Gray's Inn Tax Chambers
Contact: michael.firth@taxbar.com
F3. Double tax treaties
GENERAL PRINCIPLES
Effect in domestic law
- No effect in domestic law without legislation
"[5] The Convention has no effect in UK law without legislation. The Convention takes effect by the Order in Council, to which I have already referred, made under Section 788(1). Paragraph 2 of the 1978 Order made the declaration identified in section 788(1)...(HMRC v. UBS AG [2007] EWCA Civ 119, Moses, Sedley, Arden LJJ)
- Treaty relief takes priority over subsequent charging provision in domestic law
"[20] The Treaty was originally entered into on 8 September 1978, and has since been amended. It has effect for the purposes of relieving double taxation by virtue of The Double Taxation Relief (Taxes on Income) (Canada) Order 1980 (SI 1980/709), made by an Order in Council pursuant to what is now Chapter 1 of Part 2 of TIOPA. It is uncontroversial that, if relief is available, then that will override the domestic charging provisions, even if those provisions are enacted later than the relevant Order in Council: s.6 TIOPA (previously s.788 of the Income and Corporation Taxes Act 1988). The constitutional reason for this is articulated in the illuminating judgment of Singh LJ in Irish Bank Resolution Corporation Ltd v HMRC [2020] EWCA Civ 1128, [2020] STC 1946 ("Irish Bank"), where he explained at [55]-[57] that the doctrine of implied repeal does not operate in the context of double tax treaties." (Royal Bank of Canada v. HMRC [2023] EWCA Civ 695)
- Full effect may not be given
"[5] ... Accordingly the Convention, set out in full to the Schedule to the Order, has effect in accordance with section 788(3). This provides :-
"Subject to the provisions of this Part, the arrangements shall, notwithstanding anything in any enactment, have effect in relation to income tax and corporation tax in so far as they provide-
(a) for relief from income tax, or from corporation tax in respect of income or chargeable gains; or
…
(d) for conferring on persons not resident in the United Kingdom the right to a tax credit under section 231 in respect of qualifying distributions made to them by companies which are so resident."
[6] It is, thus, apparent that section 788 may not fully incorporate a Double Taxation Convention ("DTA"). The Special Commissioners gave a number of examples where this has occurred (see paragraph 42 of their Decision). Nolan LJ recalled in R v IRC ex p Commerzbank AG [1991] 68 TC 252 that provisions in double tax conventions may benefit only one party (260D). The terms of section 788(3) show that the draftsman did not intend that everything in a DTA should become part of the law of the United Kingdom (see e.g. Park J in NEC Semi-Conductors v IRC [2004] STC 489 at paragraphs 9, 10, 35-38, the first two paragraphs cited with approval in this court at [2006] EWCA Civ 25 at paragraph 25). Ex p. Commerzbank itself provides an illustration of the limited effect of section 788(3) ; although a refusal of repayment supplement offended the non-discrimination provision in the German Convention, the bank had no effective remedy in domestic law for that breach because repayment supplement is not covered by section 788(3)." (HMRC v. UBS AG [2007] EWCA Civ 119, Moses, Sedley, Arden LJJ)
Purpose
- Dual purpose: eliminate double taxation and prevent avoidance of taxation
"[34] Secondly, DTAs respect the principle of taxation by the State of residence. They aim to avoid the taxation of residents twice over on the same income. What DTAs do not aim to do is to facilitate the avoidance of tax, or its reduction below the level of tax ordinarily paid by residents. In those circumstances it is a legitimate aim of the public policy of the State in fiscal matters to ensure that DTAs relieve double taxation of residents rather than serve as an instrument used by taxpayers who choose to participate in artificial arrangements to avoid or reduce their level of taxation. In principle retrospective legislation may be justified for the purpose of implementing that policy." (R (oao Huitson) v. HMRC [2011] EWCA Civ 893, Mummery LJ)
"[54] The correct approach to the construction of a double taxation treaty was also considered in Bayfine UK v HMRC [2011] EWCA Civ 304. The double taxation treaty in that case contained the same preamble as the Treaty in this case. At [17], Arden LJ said, in relation to that preamble:
“17. These words, however, make it clear that the primary purposes of the Treaty are, on the one hand, to eliminate double taxation and, on the other hand, to prevent the avoidance of taxation. In seeking a purposive interpretation, both these principles have to be borne in mind. Moreover, the latter principle, in my judgment, means that the Treaty should be interpreted to avoid the grant of double relief as well as to confer relief against double taxation.” (Davies v. HMRC [2020] UKUT 67 (TCC), Morgan J and Judge Andrew Scott)
Taxing rights
- Negotiating a treaty involves economic choices and tradeoffs
"[5] Tax treaties are replete with choices. One key choice made by Canada and Luxembourg was to deviate from the Organisation for Economic Co-operation and Development ('OECD') Model Tax Convention on Income and on Capital ('OECD Model Treaty') by including a specific carve-out provision for immovable property, also called the business property exemption. This carve-out allocates to a person's residence state the right to tax capital gains realized on the disposition of shares or other similar interests deriving their value principally from immovable property used in a corporation's business. The rationale of the carve-out is not connected to the theory of economic allegiance. In fact, this provision is a clear departure from this theory, for the source state normally has the greater economic claim to tax income derived from immovable property or a business situated within its territory.
[6] Canada's decision to forego its right to tax such capital gains realized in Canada was based on economic considerations broader than generating tax revenues. Tax law is designed not only to bring revenues into a state's coffers but also to incentivize or disincentivize certain behaviours (Canada Trustco Mortgage Co v Canada 2005 SCC 54, (2005) 8 ITLR 276, [2005] 2 SCR 601, at para [53]). Indeed, in agreeing to include the carve-out in the Treaty, Canada sought to encourage investments by Luxembourg residents in business assets embodied in immovable property located in Canada (eg mines, hotels, or oil shales) and to reap the ensuing economic benefits. This incentive was never intended to be limited to Luxembourg residents with 'sufficient substantive economic connections' to Luxembourg. Internationally, residency typically does not depend on the existence of such connections; formal criteria for residency are just as well accepted as factual criteria.
[7] In this case, Alta Luxembourg made exactly such an investment. It is a resident of Luxembourg and, as such, is exempt from Canadian taxes on the capital gain realized on the disposition of shares of its wholly owned Canadian subsidiary.
[8] In my respectful view, my colleagues Rowe and Martin JJ undertake their analysis as though the Treaty were a simple statute rather than a freely negotiated bargain whose interpretation must reflect the intentions of the parties that drafted it. Canada understood that it was dealing with a low-tax jurisdiction, and, in recognition of this reality, it agreed to specific terms in the Treaty, such as the business property exemption. In this way, Canada effectively agreed to give up its right to tax certain entities incorporated in Luxembourg in exchange for the jobs and economic opportunities that the business property exemption would promote. This decision can hardly be questioned." (Alta Energy Luxembourg SARL v. R (2021) 24 ITLR 346, Supreme Court of Canada)
"[63] When interpreting a double tax convention, it is important to recall that double tax treaties are generally the subject of hard bargaining between contracting states (as to this, see the comments of Lord Walker in the Pirelli case at [97]), and that contracting states have their own reasons for entering into such treaties. For instance, a contracting state may take into account considerations of its own fiscal policy. In so doing, it would be open to it to take the view (for example) that it should confer generous tax benefits on non-residents with a view to encouraging investment in its own state. But, likewise, it might take the contrary view that it did not wish to encourage investment (for example) by an enterprise resident in the other contracting state which carried on business within its own jurisdiction, but made losses, and thus paid no tax. These are not questions for the court interpreting the treaty, but underscore the need for the court to interpret the treaty and any implementing legislation with attention to its precise terms." (HMRC v. UBS AG [2007] EWCA Civ 119, Arden LJ)
- No presumption as to which state should be entitled to tax (not choosing between tax and no tax)
"[92] I accept [the taxpayer's] submission that it is important to bear in mind that the UK/Canada Convention is not determining whether a particular stream of revenue should be taxed or tax free. Instead, it is identifying where the boundary lies between on the one hand Canada's power to tax the profits attributable to the Canadian business of a Canadian-resident company and on the other hand HMRC's power to tax profits which derive from the exploitation of the UK's natural resources. The requirement in Article 21 of the UK/Canada Convention that the Contracting States eliminate double taxation means that the application of its terms is intended, generally speaking, to be a zero-sum game, even where the Convention does not confer an exclusive right to tax on one of the Contracting States. I agree that there is no underlying presumption as to where that boundary should fall - it depends on the proper construction of the Convention.
...
[98]...The policy behind the inclusion of Article 6(2) in the UK/Canada Convention (as well as Article 13 and Article 27A) is undoubtedly to shift some of the taxing rights that would otherwise belong to the jurisdiction where the company is resident to the jurisdiction where the oil is located. That has no doubt been achieved by those Articles to a very considerable extent even giving them the interpretation favoured by the Court of Appeal. Whether they go even further as HMRC contend depends on the meaning of the words and is not helped by appeals to the economic link between the UK and the North Sea, or to the purpose of the provisions or to the parent/subsidiary relationship between Sulpetro and Sulpetro (UK)." (HMRC v. Royal Bank of Canada [2025] UKSC 2)
- Extent to which a particular policy has been pursued in treaty depends on words
"[98]...The policy behind the inclusion of Article 6(2) in the UK/Canada Convention (as well as Article 13 and Article 27A) is undoubtedly to shift some of the taxing rights that would otherwise belong to the jurisdiction where the company is resident to the jurisdiction where the oil is located. That has no doubt been achieved by those Articles to a very considerable extent even giving them the interpretation favoured by the Court of Appeal. Whether they go even further as HMRC contend depends on the meaning of the words and is not helped by appeals to the economic link between the UK and the North Sea, or to the purpose of the provisions or to the parent/subsidiary relationship between Sulpetro and Sulpetro (UK)." (HMRC v. Royal Bank of Canada [2025] UKSC 2, Lady Rose)
- Source state has primary taxing rights over active income and residence state has primary rights over passive income
"[77] The function of double tax conventions in apportioning taxing rights between the State of residence and the State of source, and a distinction that is generally drawn between "active" and "passive" income in making that apportionment, was considered in an illuminating passage in Alta Energy in the context of the Canada/Luxembourg treaty (from the judgment of Côté J with whom the majority agreed):
"[73] Broadly speaking, the apportionment of taxing rights between the residence and source states under the OECD Model Treaty, which serves as a model for the Treaty, is centred on the distinction between active and passive income (Li and Cockfield, at p. 12; Avi-Yonah, Sartori and Marian, at p. 155). The source state has the primary right to tax active income (e.g. business profits and employment income), and the residence state has only residual rights. Pursuant to the theory of economic allegiance, the source state has a greater claim to tax active income because its economic environment has the closest connection with the origin of wealth (Malherbe, at p. 56; Li and Cockfield, at pp. 66 and 151). Non-residents owe allegiance to the source state as a result, and they are expected to pay tax for the public services from which they benefit in carrying on their active economic activities in the source state.
[74] Conversely, the residence state has the primary right to tax passive income (e.g. interest, dividends, and capital gains), and the source state has only residual rights. The source state's claim to tax passive income is considered weaker in comparison to that of the residence state because generating such income is assumed to require few public services from the source state. Moreover, the economic environment of the source state is considered less material to the earning prospect of passive investments, as such passive activities may be conducted in various jurisdictions without either improving or negatively affecting their earning prospect. Therefore, non-residents earning passive income owe little allegiance to the source state."
[78] The provisions of the Convention illustrate both the significance of residence and the distinction noted in Alta Energy between active and passive income."(HMRC v. GE Financial Investments [2024] EWCA Civ 797, Falk, Arnold, Whipple LJJ and see Alta Energy Luxembourg SARL v. R (2021) 24 ITLR 346, Supreme Court of Canada)
- Benefits to residents indicates substantive connection with territory required
"[79] The starting point is Article 1(1), which makes clear that (unless specifically provided otherwise) the Convention applies to residents of one or both States. That is important. The Convention confers material benefits on taxpayers to whom it applies, and the Contracting States have agreed that those benefits should be available only to their respective residents. I pause here to note that, if GEFI's argument were right, an entity based anywhere in the world the shares in which were stapled to a US entity would have to be granted the benefits of the Convention.
...
[81] The importance of the residence concept means that both States have a clear interest in delineating the scope of the other State's ability to determine who falls within the concept of Treaty residence, because where a person is resident in that other State the source State may well have to cede or at least restrict domestic taxing rights. (Indeed, in the particular context of the Convention the United Kingdom's interest is arguably heightened for corporate entities because of the fact that the tie-breaker in Article 4(5) depends on mutual agreement, and if agreement cannot be reached it must allow a credit for US tax paid on US source income against UK tax on the same income: [22] above.)" (HMRC v. GE Financial Investments [2024] EWCA Civ 797, Falk, Arnold, Whipple LJJ)
- Predominantly source states may accept compromise in order to attract investment
"[77] Canada was and still is a large importer of foreign capital and thus a source country (Arnold (2009), at pp 10–11). As a source country, Canada would have had an interest in negotiating broad source-based taxation rights in bilateral treaties in order to collect larger tax revenues. According to learned authors, Canada must have been alive, however, to the fact that its position on source-based taxation could also be used as an instrument to attract foreign investment crucial to its economy (Li and Cockfield, at p 153). Harsh source taxes chase away foreign investors, whereas tax breaks attract them. Importers of capital thus have an interest in maintaining a balance between these disincentives and incentives if they want to remain competitive in the global economy. Li and Avella say that Canada has routinely included the carve-out in many of its tax treaties, including this Treaty, for this specific reason (s 3.1.4.6.3). This tax break encourages foreigners to invest in immovable property situated in Canada in which businesses are carried on (eg mines, hotels, or oil shales), rather than simply to invest in assets to be held for speculative purposes.
...
[88] This is not an absurd proposition, as my colleagues assert. There is no better way to describe Canada's attitude at the time of the Treaty when faced with the dilemma between higher tax revenues and competitiveness than to quote the words of the Department of Finance's response to the Report of the Auditor General of Canada to the House of Commons, 1992, at p 52:
'To a large degree, international norms limit the range of options available to the Canadian government and, in this context, the government's policy has generally been to favour competitiveness concerns over those of revenue generation.' [Emphasis added.]" (Alta Energy Luxembourg SARL v. R (2021) 24 ITLR 346, Supreme Court of Canada)
Economic reality
- Tax code generally applies on the basis of legal rather than economic reality
"The idea that an "artificial creation of the legislature", namely a company, has a separate legal personality from its shareholders has been protected and reaffirmed from Salomon v A Salomon & Co Ltd [1897] AC 22 onwards. It was essential, Lord Halsbury LC said in that landmark case, that "once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself". Generally speaking, the tax code is drafted and applied on the basis of legal rather than economic reality. Separate corporate entities within the same corporate group are taxed individually; a company's income and assets are not treated as "really" being those of its shareholder whether that shareholder is another corporate entity or an individual taxpayer. The tax code is drafted on the basis that a subsidiary of a corporate group may be and often is tax resident in a different jurisdiction from its shareholder. That is why the concept of the permanent establishment was created." (HMRC v. Royal Bank of Canada [2025] UKSC 2, Lady Rose)
- Court refusing to ignore the separate personality of parent and subsidiary even where parent provides all funding and receives all the result of subsidiary activity
"[84] Mr Prosser's second argument stresses that it is Sulpetro rather than Sulpetro (UK) which provides all the money and equipment, the budget and work programmes to explore and develop the Buchan Field. The Illustrative Agreement places all the burden of carrying out the exploration and development work on Sulpetro rather than on Sulpetro (UK) and it is Sulpetro rather than Sulpetro (UK) that bears all the risk of losing that investment if no oil is found. In those circumstances, the economic effect of the relationship is that it is Sulpetro rather than - or as well as - Sulpetro (UK) which is exercising the right to work the Buchan Field under the licence. The Illustrative Agreement only makes commercial sense because Sulpetro (UK) is a subsidiary of Sulpetro. No arm's length arrangement would strip out any chance of profit accruing to Sulpetro (UK) and give the right to all future revenues and profit to Sulpetro.
...
[86] As Falk LJ recognised in para 113, this argument requires the court to ignore the separate legal personality of the subsidiary company and treat it as one person with its parent Sulpetro. One must not, of course, treat Sulpetro (UK) as being the same legal person as its parent for all purposes under the Illustrative Agreement because the licence could only have been granted to a UK resident corporate entity. Complying with that requirement precluded treating Sulpetro and Sulpetro (UK) as the same entity - the mechanism devised by the UK to achieve its goals depended on the two companies remaining distinct.
[87] I agree with Falk LJ that it is not possible to ignore the legal structure for the purpose of applying the provisions of the UK/Canada Convention either.
[88] The idea that an "artificial creation of the legislature", namely a company, has a separate legal personality from its shareholders has been protected and reaffirmed from Salomon v A Salomon & Co Ltd [1897] AC 22 onwards. It was essential, Lord Halsbury LC said in that landmark case, that "once the company is legally incorporated it must be treated like any other independent person with its rights and liabilities appropriate to itself". Generally speaking, the tax code is drafted and applied on the basis of legal rather than economic reality. Separate corporate entities within the same corporate group are taxed individually; a company's income and assets are not treated as "really" being those of its shareholder whether that shareholder is another corporate entity or an individual taxpayer. The tax code is drafted on the basis that a subsidiary of a corporate group may be and often is tax resident in a different jurisdiction from its shareholder. That is why the concept of the permanent establishment was created.
[89] There are some statutory inroads to this general principle that the separate existence of different legal entities which can be tax resident in different jurisdictions is recognised and accommodated by the tax code. For example, the CTA 2010 provides for group relief whereby losses can be transferred between companies within the same group to offset profits made by a different company. But the companies are still treated as separate legal entities, and the surrendering company must consent to the claimant company using its losses. Where an exception is made to the principle that every person, legal or natural, is a separate taxable entity with its own tax residence, the circumstances are carefully defined by the legislation without a general appeal to economic interests or to reality or to what is "actually going on".
[90] Beyond that, it is true that there has been a greater tendency of the courts to neutralise the effect of tax avoidance schemes by looking at the reality of a transaction to see whether it is a transaction that was intended to be caught by a particular taxing provision. The court looks at the transaction as a whole, ignoring the fact that it was effected by a series of pre-ordained separate steps which, if analysed individually, may arguably have fallen outside the charge. The Ramsay principle, recently discussed by this court in Rossendale Borough Council v Hurstwood Properties (A) Ltd [2021] UKSC 16, [2022] AC 690, explains when a court can to that extent focus on the reality of what is happening combined with a purposive interpretation of the taxing provision. No one here has suggested that the Ramsay principle has any application to the present facts and nothing in this judgment casts doubt on the efficacy of those principles where they apply. If the conclusion of the Illustrative Agreement between Sulpetro and Sulpetro (UK) was pre-ordained once the licence had been granted to Sulpetro (UK), that was because the UK Government ordained it and not because it necessarily suited the Sulpetro group."(HMRC v. Royal Bank of Canada [2025] UKSC 2)
DEFINITIONS OF TERMS IN TREATIES
- References to domestic law definitions may still need to take account of treaty context
"[129] However, it is worth noting two points. First, it is not obvious to me that UK tax law principles should be applied without any reference to the broader principles that apply in interpreting the Convention, and in particular the need to consider the meaning of words in their context. The context here includes a clear distinction between interest attributable to a business carried on in a Contracting State and interest derived in other circumstances: essentially the difference between active and passive income discussed in Alta Energy (see [77] above). However, I will not develop this point further given the common ground between the parties in this case." (HMRC v. GE Financial Investments [2024] EWCA Civ 797, Falk, Arnold, Whipple LJJ)
RIGHT TO TAX RESIDENTS
- Nothing in convention affects ability to tax residents, save for specified provisions
"(3) This Convention shall not affect the taxation, by a Contracting State, of its residents except with respect to the benefits granted under paragraph 3 of Article 7, paragraph 2 of Article 9 and Articles 19, 20, 23 [A] [B], 24, 25 and 28." (Model Article 1(3))
"(4)Notwithstanding any provision of this Convention except paragraph 5 of this Article, a Contracting State may tax its residents (as determined under Article 4 (Residence)), and by reason of citizenship may tax its citizens, as if this Convention had not come into effect.
(5) The provisions of paragraph 4 of this Article shall not affect:
(a) the benefits conferred by a Contracting State under paragraph 2 of Article 9 (Associated Enterprises), sub-paragraph b) of paragraph 1 and paragraphs 3 and 5 of Article 17 (Pensions, Social Security, Annuities, Alimony, and Child Support), paragraphs 1 and 5 of Article 18 (Pension Schemes) and Articles 24 (Relief From Double Taxation), 25 (Non discrimination), and 26 (Mutual Agreement Procedure) of this Convention; and
(b) the benefits conferred by a Contracting State under paragraph 2 of Article 18 (Pension Schemes) and Articles 19 (Government Service), 20 (Students), 20A (Teachers), and 28 (Diplomatic Agents and Consular Officers) of this Convention, upon individuals who are neither citizens of, nor have been admitted for permanent residence in, that State.’" (US/UK Treaty, Article 1(4), (5))
EFFECT OF TREATY SAYING SOURCE STATE "MAY" TAX
Residence state must eliminate double taxation by exemption or credit
(1) Exemption method
General rule: resident state must exempt
"1. Where a resident of a Contracting State derives income or owns capital which may be taxed in the other Contracting State in accordance with the provisions of this Convention (except to the extent that these provisions allow taxation by that other State solely because the income is also income derived by a resident of that State or because the capital is also capital owned by a resident of that State), the first-mentioned State shall, subject to the provisions of paragraphs 2 and 3, exempt such income or capital from tax.
Dividends and interest: resident state to give credit for tax paid in source state
2. Where a resident of a Contracting State derives items of income which may be taxed in the other Contracting State in accordance with the provisions of Articles 10 and 11 (except to the extent that these provisions allow taxation by that other State solely because the income is also income derived by a resident of that State), the first-mentioned State shall allow as a deduction from the tax on the income of that resident an amount equal to the tax paid in that other State. Such deduction shall not, however, exceed that part of the tax, as computed before the deduction is given, which is attributable to such items of income derived from that other State.
Exempt income may still be taken into account in calculating tax on other income in residence state
3. Where in accordance with any provision of the Convention income derived or capital owned by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital.
No requirement for exemption where source state applies convention to exempt the income from tax
4. The provisions of paragraph 1 shall not apply to income derived or capital owned by a resident of a Contracting State where the other Contracting State applies the provisions of this Convention to exempt such income or capital from tax or applies the provisions of paragraph 2 of Article 10 or 11 to such income." (Model Convention, Article 23A)
(2) Credit method
General rule: residence state to give credit for tax paid in source state against tax on the same income
"1. Where a resident of a Contracting State derives income or owns capital which may be taxed in the other Contracting State in accordance with the provisions of this Convention (except to the extent that these provisions allow taxation by that other State solely because the income is also income derived by a resident of that State or because the capital is also capital owned by a resident of that State), the first-mentioned State shall allow: a) as a deduction from the tax on the income of that resident, an amount equal to the income tax paid in that other State; b) as a deduction from the tax on the capital of that resident, an amount equal to the capital tax paid in that other State. Such deduction in either case shall not, however, exceed that part of the income tax or capital tax, as computed before the deduction is given, which is attributable, as the case may be, to the income or the capital which may be taxed in that other State.
Exempt income may still be taken into account in calculating tax on other income
2. Where in accordance with any provision of the Convention income derived or capital owned by a resident of a Contracting State is exempt from tax in that State, such State may nevertheless, in calculating the amount of tax on the remaining income or capital of such resident, take into account the exempted income or capital." (Model Convention, Article 23B)
NON-DISCRIMINATION
- Query whether taxation includes a right to tax credits not reducing the charge to tax
"[23] The determination of the entitlement of a company resident in the United Kingdom to a tax credit is part of the process of computation of its liability. Entitlement depends upon receipt of a qualifying distribution, as defined by section 14(2) of the Taxes Act, from a company resident in the United Kingdom (see section 231(1)). I shall return later to the issue as to how that entitlement may be deployed by a resident company, in the context of section 788(3). For present purposes, it is sufficient to observe that although a company will only receive a tax credit when it makes a claim, in its return under section 42(5A) and (10A) of the Taxes Management Act 1970 (pursuant to the references to claims in sections 242(1)(a) and 243(1)), the basis of entitlement is logically prior and forms part of the system whereby taxation is imposed. The French text of the Convention has equal authority (see the closing words of the Order). Its reference to :
"L'imposition…n'est pas etablie…d'une facon moins favourable ",
conveys the same notion of a system of taxation." (HMRC v. UBS AG [2007] EWCA Civ 119, Moses LJ)
"[80] The contrary conclusion on the application of section 23(2) is expressed by the judge and accepted by Moses LJ. The judge held that the tax credit constitutes part of the levying of corporation tax even though the provision for payment of the surplus only operates in circumstances where there can never be any question of a liability to make an actual payment tax (judgment, para 33). As I have already explained, in my judgment, "the taxation", for art 23 purposes, refers to the tax payable on the profits chargeable to tax less any relief or allowance which reduces it. That would not include the associated tax credit in this case, which does not reduce the charge to tax." (HMRC v. UBS AG [2007] EWCA Civ 119, Arden LJ)
Extent of incorporation into UK law
- Claims for tax credits are not reliefs
"[84] I agree with what Moses LJ has held on this issue and have little to add. UBS has to show that the utilisation of tax credits to offset losses would constitute a relief against corporation tax. Even if a provision for the payment of the tax credit is a relief for the reasons explained by Moses LJ, dividends received by a permanent establishment of non-resident company are not brought into the charge to corporation tax. As already explained, the fact that under section 242 franked investment income is treated as if it were profits does not convert that income into profits chargeable to tax. Under section 243, franked investment income is treated as trading income of the accounting period for the purposes only of the claim to offset losses. Accordingly, this section too is not effective to create profits chargeable to corporation tax. By making a payment of ACT, the company that paid the dividend has paid a sum to be set against its own "mainstream" corporation tax: see the passage already quoted from the speech of Lord Nicholls in the Pirelli case. Thus a refund of the tax credit to UBS would not be a payment of any tax paid on its account. In my judgment, it is not enough for UBS to point to the ultimate acceleration of corporation tax which would result from the absorption of its losses by offset against dividend income and tax credit for similar reasons to those given in relation to art 23. In my judgment, "relief …from corporation tax" for the purposes of section 788(3)(a) must be a relief from a charge to corporation tax which has arisen or which is certain to arise. For all these reasons, I agree that UBS's claim does not fall within section 788(3)(a) and that accordingly the respondent's notice must be dismissed." (HMRC v. UBS AG [2007] EWCA Civ 119, Arden LJ)
Limits
- Not available where reliance would be inconsistent with express agreement in another article
"[85] I agree with the judgment of Moses LJ and there is little that I wish to add on this issue. Since the convention excludes the entitlement to an associated tax credit in the case of a Swiss enterprise which carries on business in the United Kingdom through a permanent establishment and which has received dividends from United Kingdom companies through that permanent establishment, I agree with Moses LJ that UBS can place no reliance on art 23 for the purpose of establishing its claim to a tax credit. A claim by it under that article is inconsistent with what the parties to the convention expressly agreed in art 10. That being so, there is no provision within the convention for conferring on permanent establishments within art 10(5) "the right to a tax credit under section 231". Some further support for this conclusion can be obtained from the fact that section 788(3)(d) uses the words " under section 231" when those words are already included in the statutory definition of tax credit in section 832 of the 1988 act. The duplication of those words in section 788(3)(d) is a further indication that the tax credits referred to in section 788(3)(d) are limited to those expressly referred to in section 231 and not to those referred to in section 242 and (by implication only) section 243.
" (HMRC v. UBS AG [2007] EWCA Civ 119, Arden LJ)
PROCEDURE
- Relief under double tax treaty not automatic - must be claimed
Apply normal time limit rules
"[84] We have reached the conclusion that [HMRC] is right that if the Appellants were able to rely on Article 7, then they were required, in their self-assessment tax returns, to return the deemed income in accordance with the transfer of assets abroad provisions and then to claim relief in reliance on Article 7. Such a claim would come within section 788(3)(a) and had to be made by reason of section 788(6) and, further, had to be made within the time limit imposed by section 43 TMA 1970. Further, in response to the discovery assessments which were based on section 739 ICTA 1988 and sections 720 and 721 ITA 2007, the Appellants had to claim relief in reliance on Article 7 pursuant to section 788(3)(a) and (6) within the time limit imposed by section 43(2) TMA 1970. Such a claim would naturally come within the wording of section 788(3)(a)." (Davies v. HMRC [2020] UKUT 67 (TCC), Morgan J and Judge Andrew Scott)
See further: time limits for claims