“96. The answer to the second question referred must therefore be: where a subsidiary resident in one member state has been obliged to pay [ACT] in respect of dividends paid to its parent company having its seat in another member state even though, in similar circumstances, the subsidiaries of parent companies resident in the first member state were entitled to opt for a taxation regime that allowed them to avoid that obligation, Article 52 of the Treaty requires that resident subsidiaries and their non-resident parent companies should have an effective legal remedy in order to obtain reimbursement or reparation of the financial loss which they have sustained and from which the authorities of the member state concerned have benefited as a result of the advance payment of tax by the subsidiaries. The mere fact that the sole object of such an action is the payment of interest equivalent to the financial loss suffered as a result of the loss of use of the sums paid prematurely does not constitute a ground for dismissing such an action. While, in the absence of Community rules, it is for the domestic legal system of the member state concerned to lay down the detailed procedural rules governing such actions, including ancillary questions such as the payment of interest, those rules must not render practically impossible or excessively difficult the exercise of rights conferred by Community law.”
“Subject to sections 95(1)(b) and 247, where a company resident in the United Kingdom makes a qualifying distribution and the person receiving the distribution is another such company or a person resident in the United Kingdom, not being a company, the recipient of the distribution shall be entitled to a tax credit equal to such proportion of the amount or value of the distribution as corresponds to the rate of advance corporation tax in force for the financial year in which the distribution is made.”
“(3) 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 – … (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.” … (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.”
“a tax credit equal to one half of the tax credit to which an individual resident in the United Kingdom would have been entitled had he received those dividends, and to the payment of any excess of that tax credit over its liability to tax in the United Kingdom.”
“That the case be remitted back to … the High Court of Justice Chancery Division to decide the unresolved factual question whether, had group income election been available to the Pirelli group, the group would have elected to have the United Kingdom subsidiaries pay the dividends in question free of ACT or, instead, would have chosen that the United Kingdom subsidiaries should pay the dividends outside group income elections, thus enabling the overseas parents to receive convention tax credits and so that in assessing the amount of compensation payable to the 4th and 5th claimants the amount of the tax credit paid to their parents should be brought into account, and to order repayment of any sums already paid by the appellants to the 4th and 5th claimants.”
“The true analysis, say Pirelli, is (i) that if a group income election had been open to and exercised by it, the dividends paid to Pirelli Netherlands/Italy would have been paid free of ACT; (ii) that admittedly (as the House of Lords has decided) at that point no [DTC] credit could or would have been payable or paid to Pirelli Netherlands/Italy; but (iii) that when Pirelli UK subsequently paid its MCT on its profits for the accounting period in which the dividends were paid, a [DTC] credit would then have been payable and paid to Pirelli Netherlands/Italy by way of compensation for the MCT so paid by their subsidiary; (iv) moreover, that credit ought to have been a larger credit than that which had been wrongly paid earlier, because it should have been equal to the full tax credit that the UK resident shareholder would have received under the UK’s dividend taxation rules rather than the half-rate credit payable under the [DTCs]; therefore (v) the most that HMRC can say on this enquiry as to compensation is that Pirelli Netherlands/Italy received early a smaller credit than the larger one they would have been entitled to later. Pirelli asserts that this analysis of the position is of fundamental significance to the calculation of the group’s loss at least in respect of its claim in respect of utilised ACT.”
“a brand new point, at least as far as the issues argued before the Court of Appeal and the House of Lords were concerned, although it is not new as far as Pirelli’s advisers have been concerned, and they argued it (or at least raised it) before Park J.”
“I have made clear that I consider that Pirelli should have raised their new point as part of their argument in the House of Lords. I have, however, also observed that I cannot be certain as to whether the House would in fact have entertained it. Since that observation reflects the possibility that the House would not have entertained it, I consider that it follows that it would be a harsh judgment on Pirelli to decide the abuse of process issue on the basis that their last chance of raising the point, and of having it conclusively decided, was when the matter was before the House of Lords. That consideration indicates to me that the just disposal of the abuse of process issue requires the benefit of any doubt on the matter to be given to Pirelli. I find further support for that conclusion from the facts that (a) the point is not a new one as far as HMRC are concerned, and they have known since the hearing before Park J that it was waiting in the wings; (b) the point is a short one (the whole hearing before me occupied less than two days); (c) it is one that is of importance not just to Pirelli, but to more than 50 other litigants who are in a like interest, a consideration which Mr Glick accepted was a relevant factor; and (d) Mr Glick in fact chose to argue the merits of the point before arguing that I should not entertain any argument on it at all, which struck me as illogical; the whole point of HMRC’s assertion that the new point amounted to an abuse of the process was, in theory, to relieve them from the burden of having to argue it. Collectively, those considerations have satisfied me that I should not regard the raising of the point as amounting to an abuse of the process, and I hold that it is not.”
“77. The starting point is that it is clear, as a matter of domestic law, that in the case of a group income election as between exclusively UK resident companies, the UK parent would not be entitled to a tax credit either when the dividend was paid or when its UK subsidiary later paid its MCT. It would, therefore, be odd if, in the case of a like election between a UK subsidiary and its foreign parent, the latter were to be entitled to a tax credit in circumstances in which a UK parent would not. Why should Community law be thought to intend such discriminatory treatment in favour of a foreign parent? I cannot see that the [ACT Class IV] case provides any support for the thought that it does or might. What it does show is (i) that Community law requires the UK to relieve economic double taxation suffered by a group in respect of a dividend paid by a UK subsidiary to a foreign parent in cases in which (a) the UK itself imposes economic double taxation by exercising taxing rights over the dividend and (b) where the UK relieves such economic double taxation in the case of a UK parent; but (ii) that the UK is not responsible for relieving economic double taxation caused by the tax regime in the home State of the parent company. 78. In the circumstances of the present case, there can be no question of the UK being under an obligation to relieve Pirelli Netherlands/Italy from any suggested economic double taxation suffered in respect of the relevant dividends. The House of Lords has decided, in a decision binding on Pirelli, that, as Lord Scott put it … : “71. … the only tax credit available, at least in this area of tax law, is a tax credit under section 231. There is no such thing as an article 10(3)(c) tax credit that is not a “tax credit under section 231”.”
“(A) Where a parent company resident in another EU/EEA Member State received dividends from its UK subsidiary and a tax credit under the terms of the relevant double tax convention (“a Class 2 Group”), are the parent company and the subsidiary entitled to contend that they need not prove that they would have made a group income election in respect of those dividends to be entitled to restitution and/or damages or is that question res judicata? (B) If the answer to (A) is “no” and/or that the question is res judicata, how do Claimants show that they would have elected to pay within a group income election and do the test Claimants meet that test?”
“The purpose of section 231 was to provide the receiving company with a tax credit equivalent in amount to the ACT payable on the dividend. The tax credit was designed to avoid tax having to be paid twice on the same dividend when tax was paid on its profits by the parent company.”
“30. By Question 1(a), the national court essentially asks whether Articles 43 EC and 56 EC preclude a rule of a Member State, such as the rule at issue in the main proceedings, which, on a payment of dividends by a resident company, grants a full tax credit to the ultimate shareholders receiving the dividends who are resident in that Member State or in another State with which the first Member State has concluded a DTC providing for such a tax credit, but does not grant a full or partial tax credit to companies receiving such dividends which are resident in certain other Member States.”
“74. The answer to Question 1(a) must therefore be that Articles 43 EC and 56 EC do not prevent a Member State, on a distribution of dividends by a company resident in that state, from granting companies receiving those dividends which are also resident in that state a tax credit equal to the fraction of the corporation tax paid on the distributed profits by the company making the distribution, when it does not grant such a tax credit to companies receiving such dividends which are resident in another Member State and are not subject to tax on dividends in the first State.”
“By comparison with resident companies receiving dividends from a resident company, a non-resident company is in an unfavourable position, in that, since its shareholders are not entitled to a tax credit, that company must increase the amount of its dividends in order for its shareholders to receive a sum equivalent to that which they would receive if they were shareholders in a resident company.” (4) Paragraph 46 recited the familiar jurisprudence of the Court that, in order to determine whether a difference in tax treatment is discriminatory, it is necessary to consider whether the companies concerned are “in an objectively comparable situation”
“68. However, once a Member State, unilaterally or by a convention, imposes a charge to income tax not only on resident shareholders but also on non-resident shareholders in respect of dividends which they receive from a resident company, the position of those non-resident shareholders becomes comparable to that of resident shareholders. 69. As regards the national measures at issue in the main proceedings, that is the case when, as is mentioned in paragraph 15 of this judgment, a DTC concluded by the United Kingdom provides that a shareholder company which is resident in the other contracting Member State is entitled to a full or partial tax credit for dividends which it receives from a company resident in the United Kingdom. 70. If the Member State of residence of the company making distributable profits decides to exercise its taxing powers not only in relation to profits made in that State but also in relation to income arising in that State and paid to non-resident companies receiving dividends, it is solely because of the exercise by that state of its taxing powers that, irrespective of any taxation in another Member State, a risk of a series of charges to tax may arise. In such a case, in order for non-resident companies receiving dividends not to be subject to a restriction on freedom of establishment prohibited, in principle, by Article 43 EC, the State in which the company making the distribution is resident is obliged to ensure that, under the procedures laid down by its national law in order to prevent or mitigate a series of liabilities to tax, non-resident shareholder companies are subject to the same treatment as resident shareholder companies. 71. It is for the national court to determine, in each case, whether that obligation has been complied with, taking account, where necessary, of the provisions of the DTC that that Member State has concluded with the State in which the shareholder company is resident (see, to that effect,Case C-265/04 Bouanich[2006] ECR I-923 , paragraphs 51 to 55).”
“In these circumstances a company which is a resident of [the Netherlands] and receives dividends from a company which is a resident of the United Kingdom shall, … provided it is the beneficial owner of the dividends, be entitled to a tax credit equal to one half of the tax credit to which an individual resident in the United Kingdom would have been entitled had he received those dividends, and to the payment of any excess of that tax credit over its liability to tax in the United Kingdom.”
“In the terminology used above, in order to fall under Article 43 EC, disadvantageous tax treatment should follow from discrimination resulting from the rules of one jurisdiction, not disparity or division of tax jurisdiction between (two or more) Member States’ tax systems.”
“In my view, it follows as a consequence of the method of dividing tax jurisdiction adopted by Member States – that is, the distinction between worldwide (home State) and territorial (source State) tax jurisdiction – that the concept of discrimination applies in different ways to States acting in home State and source State capacity. Quite simply, as the nature of the tax jurisdiction being exercised in each case differs fundamentally, an economic operator subject to home State jurisdiction cannot per se be considered to be in a comparable situation to an economic operator subject to source State jurisdiction, and vice versa. As a result, Article 43 EC imposes two different categories of obligation on a State, depending on the jurisdictional capacity in which it is acting in a particular case.”
“66. As source States have tax jurisdiction only over the income that is earned by the non-resident within the source State’s jurisdiction, they are subject to a more limited obligation under Article 43 EC. In essence, this can be expressed as an obligation to treat all non-residents in a comparable way to residents (non-discrimination), in so far as these non-residents fall within their tax jurisdiction – i.e., subject to the difference in the extent of their tax jurisdiction over residents and non-residents.”
“69. A further application of the source State non-discrimination obligation is that, in so far as a source State chooses to relieve domestic economic double taxation for its residents (for example, in taxation of dividends), it must extend this relief to non-residents to the extent that similar domestic double economic taxation results from the exercise of its tax jurisdiction over these non-residents (for example, where the source State subjects company profits first to corporation tax and then to income tax upon distribution). This follows from the principle that tax benefits granted by the source State to non-residents should equal those granted to residents in so far as the source State otherwise exercises equal tax jurisdiction over both groups.”
“88. In this regard, I would repeat that, as I explained above, the nature of the UK’s obligation, acting as source State as regards outgoing dividends, is, in so far as it exercises tax jurisdiction over non-residents’ income, to treat it in a comparable way to residents’ income. In other terms, to the extent that the UK exercises jurisdiction to levy UK income tax on dividends distributed to non-residents, it must ensure that these non-residents receive equivalent treatment – including tax benefits – as residents subject to the same UK income tax jurisdiction would receive. Put otherwise, the extent of the UK’s obligation should respect the division of jurisdiction and tax base arrived at in the applicable bilateral DTC. As held by the Court in Bouanich, it is for the national court to decide, in each case and depending on the terms of the relevant DTC, whether this obligation has been complied with.”
“However, to the extent that, pursuant to a DTC, the UK exercises jurisdiction to levy UK income tax on dividends distributed to non-residents, it must ensure that these non-residents receive equivalent treatment – including tax benefits – as residents subject to the same UK income tax jurisdiction would receive.”
“This in no way alters the obligation of a source State to treat non-residents in a comparable manner to residents, in so far as the former fall within their tax jurisdiction.”
“37. It must be held in that regard that the exemption in respect of dividends received by resident parent companies is designed to avoid the imposition of a series of charges to tax on the profits of subsidiaries which are distributed by way of dividend to the parent companies of those subsidiaries. As the Advocate General stated at point 22 of his Opinion, since the French Republic has chosen to relieve its residents of such a liability to tax, it must extend that relief to non-residents to the extent to which an imposition of that kind on those non-residents results from the exercise of its tax jurisdiction over them (see, to that effect, Test Claimants in Class IV of the ACT Group Litigation, paragraph 70).”
“Clearly, the economic double taxation, to which dividends distributed to companies not established in the Netherlands are subject, stems solely from the exercise by the Kingdom of the Netherlands of its taxing powers, which subject those dividends to dividend tax, whereas that Member State elected to prevent such economic double taxation in respect of recipient companies with their seat in the Netherlands or having a permanent establishment there which owns the shares in the company making the distribution.”
“83. It is therefore for the national court to establish whether account should be taken, in the main proceedings, of the DTC, and, if so, to determine whether that convention enables the effects of the restriction of free movement of capital identified in the context of the reply to the first question, in paragraph 28 of this judgment, to be neutralised.”
“79. Therefore, as the Advocate General noted at point 121 of his Opinion, as soon as the Kingdom of the Netherlands decided to grant fiscal investment enterprises established within its territory a concession for tax deducted abroad and to exercise its fiscal sovereignty over all dividends distributed by such enterprises to their shareholders, whether resident or established in that Member State or in others, it had to extend the benefit of that concession to fiscal investment enterprises which included shareholders not resident or established in that Member State (see, to that effect,Case C-170/05 Denkavit Internationaal and Denkavit France … paragraph 37 and the case-law cited).”
“After all, the order assumes (“so that”) that if the Court decides that an election would have been made, the parents will have to bring into account the tax credits paid to them under the relevant DTA.”
“IT IS ORDERED that: 1. There be a declaration that if any of the Claimants had exercised a group income election so that a dividend was paid without the paying company having to account for ACT, the receiving company would not have been entitled to a tax credit when the dividend was paid or at any later time. IT IS ORDERED BY CONSENT that: 2. Without prejudice to the Claimants’ right to appeal this Order to the Court of Appeal and to the Defendants’ right to contend that any particular dividend would not have been paid under a group income election, it is declared that, in computing any compensation payable to a Pirelli Subsidiary in respect of a particular dividend, the convention tax credit received by the Pirelli Parent in respect of that dividend or a dividend paid to the Pirelli Parent out of the particular dividend (plus interest on the tax credit at the relevant rate referred to in Schedule 1 hereto from the date on which the credit was received until the date on which the compensation (if any) is payable) is to be deducted pound for pound from the compensation which would otherwise be payable.”
“Permission is refused because the petition does not raise an arguable point of law of general public importance which ought to be considered by the House at this time, bearing in mind that the cause has already been the subject of judicial decision and reviewed on appeal. In relation to the point of European Community law raised in the application, the application is also refused because the correct application of Community law is so obvious as to leave no scope for any reasonable doubt. Reason why the Community law issue falls within this category: the principles reflected in the paragraphs 55 – 74 of ACT Class IV, as applied by Rimer [J] in paragraphs 76 – 78 of his opinion.”
“But Henderson v Henderson abuse of process, as now understood, although separate and distinct from cause of action estoppel and issue estoppel, has much in common with them. The underlying public interest is the same: that there should be finality in litigation and that a party should not be twice vexed in the same matter. This public interest is reinforced by the current emphasis on efficiency and economy in the conduct of litigation, in the interests of the parties and the public as a whole. The bringing of a claim or the raising of a defence in later proceedings may, without more, amount to abuse if the court is satisfied (the onus being on the party alleging abuse) that the claim or defence should have been raised in the earlier proceedings if it was to be raised at all. I would not accept that it is necessary, before abuse may be found, to identify any additional element such as a collateral attack on a previous decision or some dishonesty, but where those elements are present the later proceedings will be much more obviously abusive, and there will rarely be a finding of abuse unless the later proceeding involves what the court regards as unjust harassment of a party. It is, however, wrong to hold that because the matter could have been raised in earlier proceedings it should have been, so as to render the raising of it in later proceedings necessarily abusive. That is to adopt too dogmatic an approach to what should in my opinion be a broad, merit-based judgment which takes account of the public and private interests involved and also takes account of all the facts of the case, focussing attention on the crucial question whether, in all the circumstances, a party is misusing or abusing the process of the court by seeking to raise before it the issue which could have been raised before. As one cannot comprehensively list all possible forms of abuse, so one cannot formulate any hard and fast rule to determine whether, on given facts, abuse is to be found or not … While the result may often be the same, it is in my view preferable to ask whether in all the circumstances a party’s conduct is an abuse than to ask whether the conduct is an abuse and then, if it is, to ask whether the abuse is excused or justified by special circumstances. Properly applied, and whatever the legitimacy of its descent, the rule has in my view a valuable part to play in protecting the interests of justice.”
“60. That statement is of course directed to the raising in a second claim of an issue which could have been raised in an earlier claim but its general thrust must be equally applicable to, for example, a case in which there is a split trial on liability and damages. If a claimant succeeds on liability, it is potentially abusive for the defendant to seek to raise on the enquiry as to damages a point which goes to liability and which he could and should have raised at the liability trial. Similarly, if Pirelli could and should have raised their new tax credit point before the Court of Appeal and House of Lords (it being closely related to the points which were there argued and being said to go to the principles by reference to which the computation of loss was to be assessed), it is arguably abusive for Pirelli to seek to raise that point for the first time in the context of an enquiry as to that computation. HMRC are entitled to say that they should not now be subjected to the new point.”
“… arguments and evidence as to the hypothetical question of whether a particular claim would have been made during a notional transitional period would very often be expensive and time-consuming and likely to lead to uncertainty.”
“The March 1999 report forecast ACT utilisation of£6.8 million . However, by September, this had changed dramatically to a forecast ACT utilisation of about£2.2 million . The profitability of the group started to fall sharply in the spring of 1999. In particular, the Cable business was affected by the high value of sterling and downward pressure on prices. The Cable business also incurred substantial restructuring costs of£3.5 million and during the period went from a significant profit making position (£30.6 million in 1998) to a loss before tax of£2.4 million … It therefore became quickly apparent that there would be nowhere near the ACT capacity that we had initially predicted. In fact such was the concern with the surplus ACT position that in June 1999 an email was sent to both UK and Italian management recommending a reduction in the interim dividend to be paid in October … In the event, the group profits for the year before taxation were just£8 million compared with£36.7 million in the previous period … and the ACT utilised was just£1.8 million .”