Enforcement of foreign tax rules

The UK Supreme Court has held that a claim in the UK for repayment of monies by the Danish tax authorities alleged to have been fraudulently obtained by the appellants was not rendered inadmissible by the well-established rule (the revenue rule) that the courts of one country will not enforce the tax laws of another: Skatteforvaltningen v Solo Capital Partners LLP [2023] UKSC 40.

The claim in this case was that the appellants had fraudulently obtained repayments of amounts deducted as withholding tax on dividends paid by Danish companies. Since the Danish tax authorities contended that the appellants had not been shareholders and had not suffered the withholding tax deductions, it was not a claim for a payment of unpaid tax or based on the taxpayer having cheated the Danish tax authorities out of tax and so was not restricted by the revenue rule.

Background

Non-residents receiving dividends from Danish companies are subject to 27% withholding tax. However, it is possible to apply for a refund of that withholding tax in certain circumstances, including pursuant to relevant double tax treaties.

Solo Capital LLP (SCP) purported to provide custodian services to clients including US pension plans, Labuan companies and finance brokers. Repayment claims were made in respect of withholding tax deducted on dividend payments on behalf of these clients and were repaid by the Danish tax authorities. Subsequently, the Danish tax authorities concluded that the clients owned no shares in any relevant Danish companies, received no dividends and suffered no withholding tax. The repayments of tax had been made on the basis of false and dishonest (or reckless) representations and it had been fraudulently induced to make the payments. This particular claim is just one of five sets of proceedings covering 89 defendants.

The commercial court originally held, as a preliminary issue, that the claims fell within the scope of the revenue rule and were inadmissible. The Court of Appeal reversed that decision on the basis that the money sought was not unpaid tax, but money that had been obtained by fraud. The defendants appealed.

Decision of the Supreme Court

The Supreme Court has held that the revenue rule does not apply to the claims in this case.

The Danish tax authorities argued that the application of the revenue rule was limited to claims directly or indirectly for the payment of tax which is due, such that if no tax is due then the claim cannot fall within the rule and, following a close analysis of the case law behind the rule, the Supreme Court has agreed. "The revenue rule only applies to proceedings in which there is an unsatisfied demand for tax which foreign tax authorities seek directly or indirectly to recover. In my view... it is consistent with what I consider to be the rationale of the revenue rule. If there is no claim, directly or indirectly, to recover tax which is due, there is no attempt to assert the sovereign authority of the State which imposed the taxes within the territory of another."

In addition, the Court noted that this outcome was consistent with the well-established principle that the revenue rule does not prohibit courts from recognising, as opposed to enforcing, a foreign tax law policy, provided such recognition does not otherwise conflict with public policy.

For the purpose of applying these principles to this case, it must be assumed that the Danish tax authorities will be able to prove at trial the facts alleged by them.

The claim in this case was not for sums due as tax in Danish law nor was it a claim that the appellants were liable because they had cheated the Danish tax authorities out of tax due. The appellants were at no point liable to pay any tax and there never had been any unpaid tax in this case. The substance of the claim was not to recover tax but to recover payments made by the Danish tax authority which were induced by fraud. Accordingly, an essential element of the revenue rule is missing in this cases - the requirement that there should be tax due from the appellants.

On the assumption that the facts alleged were proved, then the person making withholding tax refund claims did not hold shares, did not receive dividends net of tax, were not subject to any liability to or deduction of withholding tax and had no entitlement to recover withholding tax. As a result, the proceedings did not involve the indirect enforcement of any liability to fraudulently evaded tax either. There never was any tax payable by the appellants on the basis of the Danish tax authorities' case.

The Supreme Court noted that this did not mean that where the revenue rule otherwise applies, fraud would remove the claim from that rule. "A claim to recover tax which had been fraudulently evaded would fall within the rule. However, in the present case there was no fraudulent evasion of tax because the applicants for "refunds" were never taxpayers."

The Court approved the statement by the Chancellor in the Court of Appeal that "Whilst, because it was induced to do what it did by fraud, SKAT thought it was making repayments or refunds to the Solo etc Applicants, they were not in fact repayments or refunds at all, but abstraction of monies by the fraudsters, ... , in the same way as if they had broken into SKAT's safe and stolen the monies."

As a result, the Court has held that the revenue rule did not prevent the application in this case going forwards.

Comment

The decision is a highly important clarification of the scope of the revenue rule in as applied by the English courts, noting that it will not apply, in principle, where there is an unsatisfied demand for tax which the foreign tax authority seeks to recover directly or indirectly.