Treaty WHT exemption not main purpose of loan acquisition

The Court of Appeal has held that having a main purpose to “take advantage of” Article 12(5) in the UK-Ireland Double Tax Treaty (tax on interest) must be read as requiring more than simply intending to “obtain the benefit” of that provision: HMRC v Burlington Loan Management DAC [2026] EWCA Civ 461. To trigger the wording of the anti-avoidance article, it requires that the purpose is to obtain the benefit in a way that is contrary to the object and purpose of the treaty.

More generally, the Court (including Falk LJ) has provided further guidance on the motive test in anti-avoidance provisions, including the unallowable purpose context. Commenting further on unconscious or intrinsic motives, Falk LJ has stressed that the particular statutory context of the legislation needs to be taken into account. As such, where a tax advantage is explicitly provided by legislation (such as a tax relief for expenditure), Parliament cannot have intended that that tax advantage should inevitably be denied by a “main purpose” rule where obtaining that tax advantage is simply part of the economics of the transaction.

Background

The case concerns interest paid on a debt claim in the administration of Lehman Brothers to an Irish acquiree of the right to the claim. The claim had originally been held by a Cayman entity, SICL, but it decided that it would sell the claim since it appeared clear that it would suffer UK withholding tax at 20% on interest received. It was aware that other entities may effectively be able to receive the interest without being subject to tax on the interest and, as such, the claim would be more valuable to such entities. In the event, the claim was bought by an Irish entity, BLM which considered that it would benefit from the exemption from UK withholding tax in Article 12 of the UK-Ireland DTT.

HMRC rejected the claim that the interest was exempt from UK withholding tax under Article 12 on the basis that Article 12(5) disapplied the exemption where “the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment”. HMRC essentially argued that either or both SICL and BLM’s main purpose in the transaction was to take advantage of the withholding tax exemption.

Both the FTT and UT rejected HMRC’s claim to apply Article 12(5) to the facts and HMRC appealed to the Court of Appeal.

Decision of the Court of Appeal

On appeal, HMRC argued that (1) the tribunals, rather than simply applying the wording of Article 12(5) had superimposed an additional requirement that it could only apply where the arrangement amounted to an “abuse” and, in addition, had focussed on the situation resulting from the assignment rather than starting from the position that subsisted before the assignment; and (2) the tribunals failed to take account of the fact that BLM’s assumed ability to obtain the benefit of the exemption was the only basis for its decision to enter into the assignment on the terms it did.

Firstly, the Court rejected BLM’s contention that Article 12(5) can only apply to artificial transactions and does not apply to transactions entered into for genuine commercial purposes. Although the Article is an anti-abuse provision, there is nothing in its wording to restrict it to those situations. The Court therefore agreed with HMRC that an element of artificiality is not a condition to its application and nor does the fact the parties have a genuine commercial purpose for entering into an assignment mean that Article 12(5) cannot apply. “However, questions of whether there are artificial aspects to a transaction and whether it has a genuine commercial rationale apart from obtaining a tax benefit, must remain highly relevant for the purposes of Article 12(5). As indicated above, double tax treaties are designed to encourage exchanges of goods and services, and the movement of capital and persons between the contracting states. The interests of the contracting states in promoting such trade will only be advanced by genuine commercial transactions. As such, the presence in a transaction of artificial features or steps that have no real business purpose may indicate that the parties have a purpose that is not consistent with the objectives of the double tax treaty.”

Secondly, however, the Court held that the phrase “take advantage of” in Article 12(5) means something more than simply obtain the benefit of the Article. It means obtaining the benefit in a way that is contrary to the object and purpose of the treaty. Turning to the question whether BLM’s reliance on Article 12(1) was contrary to the object and purpose of the treaty, the Court held that it cannot be an abuse for a taxpayer resident in one contracting state to acquire a debt-claim in the expectation that he will enjoy the benefit of exemption from tax which the treaty expressly provides someone in that position is to have. In addition, HMRC’s analysis starting from the position prior to the assignment (when SICL would have suffered withholding tax) was not sustainable. The correct starting point is that the UK agreed that BLM as a resident of Ireland and beneficial owner of the claim should only be taxed in Ireland. This was not a case involving connected parties or non-arm’s length transactions or involving conduit companies. BLM was an independent third party. BLM’s reliance on Article 12(1) was entirely in accord with the object’s and purposes of the UK-Ireland treaty.

Therefore, even if it could be said that BLM could be said to have a main purpose of obtaining the benefit of withholding tax exemption in entering into the assignment, the tribunals had been correct to conclude that there was nothing to justify a conclusion that one of BLM’s purposes was thereby to “take advantage of” Article 12(1).

(It is also worth noting that whilst the parties in the case agreed that the expression “main purpose or one of the main purposes” in Article 12 should be construed having regard to English domestic law cases on the meaning of this phrase, both Snowden LJ and Falk LJ were far from convinced that the contracting authorities should have intended to apply domestic law interpretation of that phrase without also taking into account the wider principles of interpretation of international treaties.)

Main purpose: further analysis

The decision also contains further analysis by both Snowden LJ and Falk LJ on the identification of “purpose” in UK anti-avoidance legislation. Snowden LJ referred to the approach set out by Falk LJ in BlackRock Holdco 5 and, in particular, to the fact that subjective intentions are not limited to conscious motives and that some results or consequences are so inevitably and inextricably involved in an activity that, unless they are merely incidental, they must be a purpose for it.

Snowden LJ notes that these elements are based on the well-known decision in Mallalieu v Drummond involving the expenditure by the taxpayer barrister on clothing for court not being “wholly and exclusively” expended for the purposes of her profession as it was an inescapable object that the clothing also were for the purposes warmth and decency, even if that wasn’t a conscious motive.

Two contrasting cases are then analysed by the Court, Fisher v HMRC [2021] UKSC 44 and IRC v Kleinwort Benson [1969] 2Ch 221. Fisher involved the transfer of a betting business offshore to Gibraltar and the application of the transfer of assets abroad anti-avoidance provisions. The taxpayer sought to rely on the motive defence that the purpose of avoiding tax was not the purpose or one of the purposes for the transfer. However, the Court of Appeal rejected the argument that since the main purpose was to save the business that meant that avoidance of UK betting duty was not a main purpose of the transfer. Avoiding betting duty was the means of saving the business and the two motives were inseparable.

Kleinwort Benson involved a merchant bank acquiring debenture stock. Its purchase was predicated on the basis that, as a dealer in securities, it could leave out of account certain interest due to be paid on the stock when drawing up its profit and loss accounts. As a result, it claimed a loss on the transaction. The Inland Revenue sought to challenge this on the basis that the loss was an impermissible “tax advantage” resulting from the transaction in securities. However, on this point, the Cross J held that the obtaining of the tax advantage of a reduction in profits had not been one of the purposes of the bank in acquiring the stock on the basis that “I do not think that one can fairly say that the object of … a dealer in shares who buys a security with arrears of interest accruing on it, is to obtain a tax advantage, simply because … the dealer in calculating the price which they are prepared to pay proceed on the footing that they will have the right which the law gives them … to exclude the interest”.

Snowden LJ commented that “I do not find the differing approaches evident in Kleinwort Benson and Fisher easy to reconcile”, however since neither was binding on the facts of this case nor necessary to the decision, “I therefore consider that it would be better to leave the resolution of this issue to a case in which it is necessary to decide it”.

Falk LJ, however, offered more analysis on these decision and indeed on her earlier comments on motive. In particular, she highlights the importance of legislative context. “Where the tax advantage in question is specifically conferred by legislation then it cannot have been intended that it should inevitably be denied by a "main purpose" rule if it forms part of the economics of a transaction. This was the point that Cross J was making with his examples and, irrespective of whether Cross J was right on the facts of Kleinwort Benson, the point is an important one.” Falk LJ then stresses that in Fisher, in contrast, it was no part of the relevant statutory code to confer the tax advantage that was sought.

Falk LJ then reiterates the point made in BlackRock Holdco 5 in the context of the unallowable purpose rules that corporation tax relief for interest is obviously a valuable relief and it “cannot have been Parliament's intention that the inevitable consequence of taking out a loan should engage the unallowable purpose rules, subject only to consideration of whether the value of the tax relief is sufficient to make it a 'main' purpose. Something more is needed”. Equally, just as “the unallowable purpose rules form part of a statutory code which confers tax relief for debt financing costs, and must be interpreted in that context, so too must Article 12(5). Article 12 confers on Irish resident taxpayers a potentially valuable benefit in the form of an exemption from UK WHT on interest. If HMRC's arguments were right then it would be very hard to see how that relief could be relied on in any case where the exemption is of more than incidental economic significance.”

Comment

The decision is another important one dealing with the meaning and ascertainment of “purpose” in relation to anti-avoidance rules. Whilst the use of the phrase “take advantage of” has allowed the Court in this case to restrict the scope of the anti-avoidance provision in the UK-Ireland treaty, the comments of the Court suggest that this narrower approach should be applied more widely. In particularly, where a tax advantage is specifically conferred by legislation, as a matter of construction of that legislation it cannot have been intended that the tax advantage should inevitably be denied by a “main purpose” rule if it forms part of the economics of the transaction.