Revenue And Customs v Coal Staff Superannuation Scheme Trustees Ltd [2019] EWCA Civ 1610

“For example, one of the transactions involved a loan of 5.5 million shares in an Italian company to Lehman Bros, London. The loan period was 6 March 2006 to 12 May 2006. On 27 April 2006 the Italian company paid a dividend of €1,210,000. Italy operated a withholding tax of 15% on dividends. The borrower paid a MOD of €1,210,000, amounting to €1,028,500 net of withholding tax. The MOD withholding tax amounted to €181,500.”

“1. Within the framework of the provisions set out in this Chapter, all restrictions on the movement of capital between Member States and between Member States and third countries shall be prohibited. 2. Within the framework of the provisions set out in this Chapter, all restrictions on payments between Member States and between Member States and third countries shall be prohibited.”

“1. The provisions of Article 63 shall be without prejudice to the right of Member States: (a) to apply the relevant provisions of their tax law which distinguish between taxpayers who are not in the same situation with regard to their place of residence or with regard to the place where their capital is invested; (b) to take all requisite measures to prevent infringements of national law and regulations, in particular in the field of taxation and the prudential supervision of financial institutions, or to lay down procedures for the declaration of capital movements for purposes of administrative or statistical information, or to take measures which are justified on grounds of public policy or public security. 2. The provisions of this Chapter shall be without prejudice to the applicability of restrictions on the right of establishment which are compatible with the Treaties. 3. The measures and procedures referred to in paragraphs 1 and 2 shall not constitute a means of arbitrary discrimination or a disguised restriction on the free movement of capital and payments as defined in Article 63. 4. In the absence of measures pursuant to Article 64(3), the Commission or, in the absence of a Commission decision within three months from the request of the Member State concerned, the Council, may adopt a decision stating that restrictive tax measures adopted by a Member State concerning one or more third countries are to be considered compatible with the Treaties in so far as they are justified by one of the objectives of the Union and compatible with the proper functioning of the internal market. The Council shall act unanimously on application by a Member State.”

“2. … In principle, two levels of taxation can arise when taxing the distribution of company profits. The first is at the company level, in the form of corporation tax on the company’s profits. The levying of corporation tax at company level is common to all member states. The second is at the shareholder level, which can take the form of either income taxation on the receipt of the dividends by the shareholder (a method used by most member states), and/or withholding tax to be withheld by the company upon distribution. 3. The existence of these two possible levels of taxation may lead, on the one hand, to economic double taxation (taxation of the same income twice, in the hands of two different taxpayers) and, on the other hand, juridical double taxation (taxation of the same income twice in the hands of the same taxpayer). Economic double taxation, when, for example, the same profits are taxed first in the hands of the company as corporation tax, and second in the hands of the shareholder as income tax. Juridical double taxation, when, for example, a shareholder suffers first withholding tax and then income tax, levied by different states, on the same profits.”

“167. It must be remembered that it is for each member state to organise, in compliance with European Union law, its system for taxing distributed profits and, in that context, to define the tax base and the tax rate which apply to the shareholder receiving them (see, in particular, Test Claimants in Class IV of the ACT Group Litigation (para 50); Test Claimants in the FII Group Litigation (para 47); and Case C-194/06 Orange European Smallcap Fund [2008] ECR I-3747 (para 30)). 168. It follows that dividends distributed by a company established in one member state to a shareholder resident in another member state are liable to be subject to juridical double taxation where the two member states choose to exercise their fiscal competence and to subject those dividends to taxation in the hands of the shareholder (Damseaux v Belgium (Case C128/08) [2009] STC 2689, [2009] ECR I-6823, para 26). 169. However, the court has already ruled that the disadvantages which may arise from the parallel exercise of powers of taxation by different member states, in so far as such an exercise is not discriminatory, do not constitute restrictions prohibited by the Treaty (EC Commission v Spain (Case C153/08) [2009] ECR I-9735, para 56 and the case law cited). 170. Since European Union law, as it currently stands, does not lay down any general criteria for the attribution of areas of competence between the member states in relation to the elimination of double taxation within the European Union, the fact that both the member state in which the dividends are paid and the member state in which the shareholder is resident are liable to tax those dividends does not mean that the member state of residence is obliged, under European Union law, to prevent the disadvantages which could arise from the exercise of competence thus attributed by the two member states (see Damseaux (paras 30 and 34), and CIBA Speciality Chemicals Central and Eastern Europe Szolgáltató, Tanácsadó és Kereskedelmi Kft v Adó- és Pénzügyi Ellenőrzési Hivatal Hatósági Főosztály (Case C-96/08) [2010] STC 1680, paras 27 and 28). 171. Accordingly, art 63 cannot be interpreted as obliging a member state to provide, in its tax legislation, that a credit is to be granted for the withholding tax levied on dividends in another member state in order to prevent the juridical double taxation—resulting from the parallel exercise by the member states concerned of their respective powers of taxation—of the dividends received by a company established in the first member state (see, to this effect, Kerckhaert v Belgium (Case C-513/04) [2007] STC 1349, [2006] ECR I-10967, [2007] 1 WLR 1685, paras 22 to 24).”

“the Tax Acts shall have effect— (a) in relation to the recipient, and persons claiming title through or under him, as if the manufactured dividend were a dividend on the UK equities in question; and (b) in relation to the dividend manufacturer, as if the amount paid were a dividend of his”

“(1) This paragraph applies in any case where, under a contract or other arrangements for the transfer of overseas securities, one of the parties (the ‘overseas dividend manufacturer’) is required to pay the other (‘the recipient’) an amount representative of an overseas dividend on the overseas securities; and in this Schedule the ‘manufactured overseas dividend’ means any payment which the overseas dividend manufacturer makes in discharge of that requirement. … (2) Subject to sub-paragraph (3) below, where this paragraph applies the gross amount of the manufactured overseas dividend shall be treated, except in determining whether it is deductible, for all purposes of the Tax Acts as an annual payment, within section 349, but— (a) the amount which is to be deducted from that gross amount on account of income tax shall be an amount equal to the relevant withholding tax on that gross amount; and (b) in the application of section 350(4) in relation to manufactured overseas dividends the reference to Schedule 16 shall be taken as reference to dividend manufacturing regulations; and paragraph (a) above is without prejudice to any further amount required to be deducted under dividend manufacturing regulations by virtue of sub-paragraph (8) below. … (3) If, in a case where this paragraph applies, the overseas dividend manufacturer is not resident in the United Kingdom and the manufactured overseas dividend is paid by him otherwise than in the course of a trade which he carries on through a branch or agency in the United Kingdom, subparagraph (2) above shall not apply; but if the manufactured overseas dividend is received by a United Kingdom recipient, that recipient shall account for and pay an amount of tax in respect of the manufactured overseas dividend equal to that which the overseas dividend manufacturer would have been required to account for and pay had he been resident in the United Kingdom; and any reference in this Schedule to an amount deducted under sub-paragraph (2) above includes a reference to an amount of tax accounted for and paid under this sub-paragraph. … (4) Where a manufactured overseas dividend is paid after deduction of the amount required by sub-paragraph (2) above, or where the amount of tax required under sub-paragraph (3) above in respect of such a dividend has been accounted for and paid, then for all purposes of the Tax Acts as they apply in relation to persons resident in the United Kingdom or to persons not so resident but carrying on business through a branch or agency in the United Kingdom— (a) the manufactured overseas dividend shall be treated in relation to the recipient, and all persons claiming title through or under him, as if it were an overseas dividend of an amount equal to the gross amount of the manufactured overseas dividend, but paid after the withholding therefrom, on account of overseas tax, of the amount deducted under sub-paragraph (2) above; and (b) the amount so deducted shall accordingly be treated in relation to the recipient, and all persons claiming title through or under him, as an amount so withheld instead of as an amount on account of income tax. (5) For the purposes of this paragraph— (a) ‘relevant withholding tax’, in relation to the gross amount of a manufactured overseas dividend, means an amount of tax representative of— (i) the amount (if any) that would have been deducted by way of overseas tax from an overseas dividend on the overseas securities of the same gross amount as the manufactured overseas dividend, and (ii) the amount of the overseas tax credit (if any) in respect of such an overseas dividend. (b) the gross amount of a manufactured overseas dividend is an amount equal to the gross amount of that overseas dividend of which the manufactured overseas dividend is representative, as mentioned in sub-paragraph (1) above; and (c) the gross amount of an overseas dividend is an amount equal to the aggregate of— (i) so much of the overseas dividend as remains after the deduction of the overseas tax (if any) chargeable on it; (ii) the amount of the overseas tax (if any) so deducted; and (iii) the amount of the overseas tax credit (if any) in respect of the overseas dividend. (6) Dividend manufacturing regulations may make provision with respect to the rates of relevant withholding tax which are to apply in relation to manufactured overseas dividends in relation to different overseas territories, but in prescribing those rates the Treasury shall have regard to— (a) the rates at which overseas tax would have fallen to be deducted, and (b) the rates of overseas tax credits, in overseas territories, or in the particular overseas territory, in respect of payments of overseas dividends on overseas securities. (7) Dividend manufacturing regulations may make provision for a person who, in any chargeable period, is an overseas dividend manufacturer to be entitled in prescribed circumstances to set off in accordance with the regulations and to the prescribed extent, amounts falling within paragraph (a) of sub-paragraph (7AA) below against the sums falling within paragraph (b) of that sub-paragraph, and to account to the Board for, or as the case may be, claim credit in respect of, the balance. (7AA) Those amounts and sums are— (a) amounts of overseas tax in respect of overseas dividends received by him in that chargeable period, amounts of overseas tax charged on, or in respect of, the making of manufactured overseas dividends so received by him and amounts deducted under sub-paragraph (2) above from any such manufactured overseas dividends; and (b) the sums due from him on account of the amounts deducted by him under sub-paragraph (2) above from the manufactured overseas dividends paid by him in that chargeable period. ….”

“(a) amounts of overseas tax in respect of overseas dividends received by the overseas dividend manufacturer in the chargeable period; (b) amounts of overseas tax charged on, or in respect of, the making of manufactured overseas dividends so received by him; (c) amounts deducted under paragraph 4(2) of Schedule 23A from manufactured overseas dividends so received by him; (d) amounts accounted for and paid under paragraph 4(3) of Schedule 23A in respect of manufactured overseas dividends so received by him; (e) amounts accounted for and paid under regulation 4(3) in respect of manufactured overseas dividends so received by him.”

“119. By way of illustration, if a UK company paid a dividend of £100 to an AUKI in respect of shares which were subject to stock lending, the AUKI would receive £100. The AUKI would then pay a sum of £100 to the stock lender, in our case the Fund. The lender would therefore receive £100, which is the same amount as it would have received if it had not lent the shares. 120. If a company paying a dividend of €100 to an AUKI was resident in another EU Member State which operated a withholding tax regime it might deduct say €15 and pay €85 to the AUKI. The AUKI would then be obliged to pay the €100 MOD to the lender but subject to deduction of [Deducted Tax] of €15. The AUKI would be entitled to offset the [overseas] withholding tax of €15 it had suffered against its liability to account to HMRC for [Deducted Tax] also of €15.”

“can set off the [Deducted Tax of €15] against its income tax liability, but only to the extent that it has an income tax liability. A pension fund will have no income tax liability and is unable to offset the [Deducted Tax]. However it is in the same position as if it had not lent the shares and had received the dividend directly from the EU company.”

“111. The movement of capital relied on by the [Trustee] is in the acquisition of foreign shares, rather than simply the lending of such shares. Mr Gammie submitted that stock lending was indissociable from ownership of foreign shares. It involved acquisition and re-acquisition of foreign shares. The fact that the lending transaction takes place between UK entities does not take it outside the scope of Article 56. 112. Clearly one of the rights associated with ownership of shares is the right to enter into stock lending transactions using those shares. The nature of the stock lending transactions undertaken by the Fund involved a transfer of legal and beneficial ownership of the shares to the borrower, on terms that the same or equivalent shares would be transferred back on a future date. In our view acquisition, disposal and reacquisition of foreign shares on the terms of the OSLA plainly involve movements of capital.”

“It is said that a UK resident investor such as the Fund would be dissuaded from purchasing foreign shares in favour of purchasing UK shares because if it entered into stock lending arrangements then the manufactured dividends would be exempt whereas MODs would be taxable. That analysis focuses solely on the MOD and ignores the underlying tax treatment of dividends from such shares. We cannot see that an investor such as the Fund would be dissuaded from acquiring foreign shares because the MOD was taxable. It would know that the dividend itself from a foreign shareholding would be taxable. In other words it would be in no better or worse position than it would have been if it had not lent the shares. The MOD regime therefore would not dissuade the Fund from lending foreign shares. Nor would it dissuade the Fund from acquiring or retaining foreign shares. The only factor which might dissuade the Fund from purchasing foreign shares is that the dividends from foreign shares are subject to a withholding tax for which it could not obtain credit because its investment income as a whole was exempt from UK income tax.”

“Even if a pension fund was intending to purchase shares specifically with a view to entering into stock lending transactions, it would not be dissuaded by the MOD aspect of the regime from purchasing foreign shares. It might consider that UK shares would be a better prospect because the manufactured dividends were exempt. The reason for that is not because of the MOD regime. It is because the underlying dividend paid by the overseas company is subject to a withholding tax and the UK has chosen not to give the benefit of any credit for that withholding tax to an exempt pension fund.”

“65. … Although it is a necessary condition for the application of the regime that an amount (the MOD) representative of a dividend on the Overseas Shares is to be paid, the UK tax charge is unrelated to the actual amount of the MOD. It is also unrelated to the actual amount of overseas tax that might have been deducted by the overseas company paying the dividend. Instead, first, the relevant withholding tax [i.e. Deducted Tax] is calculated on the basis of a hypothetical receipt in the UK of a dividend on the Overseas Shares and the gross amount of the actual overseas dividend (whether or not received by the Borrower), and secondly, whatever the amount of the MOD itself, the Lender is treated as having received an overseas dividend equal to that gross amount, less the relevant withholding tax [i.e. Deducted Tax], the tax having been deducted being treated not as UK income tax, but as overseas tax. 66. The corresponding provisions for MDs on UK equities adopt a different approach. There is in that case no notional amount of the dividend. It is the actual MD that is treated as a dividend, in the case of the Borrower as a dividend paid by him, and in the case of the Lender as a dividend on the UK Shares in question. There is, in contrast to the position on MODs, no UK withholding tax on such deemed dividends nor any requirement on the part of the Borrower to account for UK tax with respect to such a dividend. 67. That, in our judgment, amounts to a relevant difference in treatment such as to amount to a restriction on the movement of capital. It is a difference that is predicated entirely on whether the shares employed in a stock lending transaction are Overseas Shares or UK Shares. The use of Overseas Shares results in those transactions being treated less favourably than objectively comparable transactions involving UK Shares.”

“The fact that the MOD was representative of an overseas dividend does not permit the system of taxation by another state of such dividend (which, by definition, is not received by the Lender) to be taken into account in recharacterising the transaction as one which arises inevitably from the operation of more than one national system. No such inevitability can be said to arise in this case.” “The overseas tax on the foreign dividend,” the UT said in paragraph 82, “cannot be taken into account to justify the imposition of a similar (if not always corresponding) amount of UK tax on a MOD.”

“…is permissible only if it pursues a legitimate objective compatible with the Treaty and is justified by imperative reasons in the public interest. It is further necessary, in such a case, that its application be appropriate to ensuring the attainment of the objective thus pursued and not go beyond what is necessary to attain it.”

“45. None the less, as the United Kingdom rightly observes, the preservation of the allocation of the power to impose taxes between Member States might make it necessary to apply to the economic activities of companies established in one of those States only the tax rules of that State in respect of both profits and losses. 46. In effect, to give companies the option to have their losses taken into account in the Member State in which they are established or in another Member State would significantly jeopardise a balanced allocation of the power to impose taxes between Member States, as the taxable basis would be increased in the first State and reduced in the second to the extent of the losses transferred.”

“69. In the light of those two considerations, concerning the need to maintain the balanced allocation of the power to tax between the Member States and to prevent tax avoidance, taken together, it must be held that legislation such as that at issue in the main proceedings pursues legitimate objectives which are compatible with the Treaty and constitute overriding reasons in the public interest and that it is appropriate for ensuring the attainment of those objectives..”

“71. National legislation which provides for a consideration of objective and verifiable elements in order to determine whether a transaction represents an artificial arrangement, entered into for tax reasons, is to be regarded as not going beyond what is necessary to attain the objectives … where, first, on each occasion on which there is a suspicion that a transaction goes beyond what the companies concerned would have agreed under fully competitive conditions, the taxpayer is given an opportunity, without being subject to undue administrative constraints, to provide evidence of any commercial justification that there may have been for that transaction.… 72. Second, where the consideration of such elements leads to the conclusion that the transaction in question goes beyond what the companies would have agreed under fully competitive conditions, the corrective tax measure must be confined to the part which exceeds what would have been agreed if the companies did not have a relationship of interdependence.”

“37. We were referred in the parties’ respective written arguments and orally to a number of reported cases on the principles to be observed in looking for a conforming interpretation in either the European Community or Human Rights contexts. In chronological order they are Pickstone v Freemans plc [1989] AC 66; Marleasing SA v La Comercial Internacional de Alimentación SA [1990] ECR I-4135; Litster v Forth Dry Dock & Engineering Co Ltd [1990] 1 AC 546; Imperial Chemical Industries plc v Colmer (No 2) [1999] 1 WLR 2035; Ghaidan v Godin-Mendoza [2004] 2 AC 557; R (IDT Card Services Ireland Ltd) v Customs and Excise Comrs [2006] STC 1252; Revenue and Customs Comrs v EB Central Services Ltd [2008] STC 2209 and the Fleming/Condé Nast cases[2008] 1 WLR 195. The principles which those cases established or illustrated were helpfully summarised by counsel for HMRC in terms from which counsel for V2 did not dissent. Such principles are that: ‘In summary, the obligation on the English courts to construe domestic legislation consistently with Community law obligations is both broad and far-reaching. In particular: (a) it is not constrained by conventional rules of construction (per Lord Oliver of Aylmerton in the Pickstone case, at p 126B); (b) it does not require ambiguity in the legislative language (per Lord Oliver in the Pickstone case, at p 126B and per Lord Nicholls of Birkenhead in Ghaidan’s case, at para 32); (c) it is not an exercise in semantics or linguistics (per Lord Nicholls in Ghaidan’s case, at paras 31 and 35; per Lord Steyn, at paras 48–49; per Lord Rodger of Earlsferry, at paras 110–115); (d) it permits departure from the strict and literal application of the words which the legislature has elected to use (per Lord Oliver in the Litster case, at p 577A; per Lord Nicholls in Ghaidan’s case, at para 31); (e) it permits the implication of words necessary to comply with Community law obligations (per Lord Templeman in the Pickstone case, at pp 120H-121A; per 74. Lord Oliver in the Litster case, at p 577A); and (f) the precise form of the words to be implied does not matter (per Lord Keith of Kinkel in the Pickstone case, at p 112D; per Lord Rodger in Ghaidan’s case, at para 122; per Arden LJ in the IDT Card Services case, at para 114).’ 38. Counsel for HMRC went on to point out, again without dissent from counsel for V2, that: ‘The only constraints on the broad and far-reaching nature of the interpretative obligation are that: (a) the meaning should “go with the grain of the legislation” and be “compatible with the underlying thrust of the legislation being construed”: see per Lord Nicholls in Ghaidan v Godin-Mendoza [2004] 2 AC 557, para 33; Dyson LJ in Revenue and Customs Comrs v EB Central Services Ltd [2008] STC 2209, para 81. An interpretation should not be adopted which is inconsistent with a fundamental or cardinal feature of the legislation since this would cross the boundary between interpretation and amendment (see per Lord Nicholls, at para 33, Lord Rodger, at paras 110–113 in Ghaidan’s case; per Arden LJ in R (IDT Card Services Ireland Ltd) v Customs and Excise Comrs [2006] STC 1252, paras 82 and 113); and (b) the exercise of the interpretative obligation cannot require the courts to make decisions for which they are not equipped or give rise to important practical repercussions which the court is not equipped to evaluate: see the Ghaidan case, per Lord Nicholls, at para 33; per Lord Rodger, at para 115; per Arden LJ in the IDT Card Services case, at para 113.’”

“. . . It is well-established that the court must interpret a statute which is on the face of it inconsistent with Community law so far as possible so that it is compatible with Community law. This enables the court to read in words or limit provisions, provided that this can be done by the process of interpretation properly so called and does not go against ‘the grain’ or cardinal features of the legislation: R (IDT Card Services Ireland Ltd) v Customs and Excise [2006] EWCA Civ 29, [2006] STC 1252; and Vodafone 2 v HMRC [2009] EWCA Civ 446, [2010] 2 WLR 288.”

“Marleasing, at any rate as it has been applied in England, is authority for a highly muscular approach to the construction of national legislation so as to bring it into conformity with the directly effective Treaty obligations of the United Kingdom. It is no doubt correct that, however strained a conforming construction may be, and however unlikely it is to have occurred to a reasonable person reading the statute at the time, a later judicial decision to adopt a conforming construction will be deemed to declare the law retrospectively in the same way as any other judicial decision. But it does not follow that there was not, at the time, an unlawful requirement to pay the tax. It simply means that the unlawfulness consists in the exaction of the tax by the Inland Revenue, in accordance with the nonconforming interpretation of what must (on this hypothesis) be deemed to be a conforming statute….”

“146 . . . Our view is that paragraph 4(4) of Schedule 23A ICTA can be construed as being subject to an exception (and so not applying to this limited extent) in the case of a recipient of a manufactured overseas dividend which, by virtue of s 186 FA 2004, has no liability to income tax, to the extent to which the recipient is, by virtue of s 796 ICTA, not entitled to credit for the relevant withholding tax. 147. The result is that the Trustee, under the MOD legislation as so construed, was entitled to be repaid the income tax equal to the relevant withholding tax deducted from the gross amount of the manufactured overseas dividend….”

“ . . . the MOD withholding tax is a deduction, under paragraph 4(2) of Schedule 23A ICTA, from the income which paragraph 4(4) provides is the income of the MOD recipient for tax purposes, namely the gross amount of the MOD. It is thus a UK tax charge on that recipient. Any limitation on recovery of that tax charge, in circumstances where no such charge is deducted in the case of MDs, would be a difference in treatment in relation to dividends on Overseas Shares when compared to dividends on UK Shares.”

“50. It is also the settled case law of the court that the right to a refund of charges levied by a member state in breach of rules of EU law is the consequence and complement of the rights conferred on individuals by provisions of EU law, as interpreted by the court. The member state is therefore required, in principle, to repay charges levied in breach of EU law: Amministrazione delle Finanze dello Stato v SpA San Giorgio (Case 199/82)[1983] ECR 3595, para 12; Société Comateb v Directeur Général des Douanes et Droits Indirects (Joined Cases C-192/95 to C-218/95)[1997] ECR I-165; [1997] STC 1006, para 20 and Lady & Kid A/S v Skatteministeriet (Case C-398/09)[2011] ECR I-7375; [2012] All ER (EC) 410, para 17. 51. According to the United Kingdom Government, however, such a right to a refund of charges unduly levied does not exist in the present case, given that the trustees, not being subject to income tax in respect of dividends, did not pay any tax in respect of the dividends to which the claimed tax credits relate. 52. However, it must be recalled that the right to a refund, within the meaning of the case law cited in para 50 above, is concerned not only with the amounts paid to the member state by way of unlawful charges but also any deducted amount the refund of which is essential in restoring the equal treatment required by the provisions of the FEU Treaty on the freedoms of movement (see, by analogy, Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397/98 and C-410/98)[2001] Ch 620, para 87; Test Claimants in the FII Group Litigation (Case C-446/04)[2012] 2 AC 436, para 205 and Littlewoods Retail Ltd v Revenue and Customs Comrs (Case C-591/10)[2012] STC 1714, para 25), including, consequently, the amounts due to the individual in respect of a tax credit of which he has been deprived under the national legislation precluded by EU law. 53. Thus, in circumstances such as those at issue in the main proceedings, shareholders not subject to income tax in respect of dividends, who have received dividends treated as FIDs without, however, having obtained a tax credit pertaining to those dividends, such as the trustees, are entitled to the payment of the tax credit of which they have been unduly deprived under the national legislation incompatible with article 63 FEU.”