Upper Tribunal provides clarity on interpretation of double tax treaty provisions

The dispute centred on the interpretation of Article 12 of the UK-Ireland double tax convention, particularly whether the assignment of a debt claim on the facts of the case had the ‘main purpose’ of taking advantage of the convention such that treaty relief should be denied.

The case (26 pages / 549 KB) concerned an assignment of a debt claim from SAAD Investments Company Limited, a company based in the Cayman Islands to Burlington Loan Management DAC’s (BLM) which was based in Ireland. The assignment entitled BLM to receive payments of yearly interest from the administration of Lehman Brothers International (Europe), a UK-based company.

Under UK law, such interest is subject to income tax in the hands of a non-UK resident company. In addition, the UK company paying the interest is obliged to withhold UK income tax. The UK legislation incorporates any applicable double tax treaty into UK law.

Before the assignment by the Cayman company, it would have suffered a 20% UK withholding tax deducted from the interest. After the assignment from the Cayman company to BLM, the UK-Ireland double tax treaty applied and the interest was potentially only taxable in Ireland, such that there would be no UK withholding tax.

HM Revenue and Customs’ (HMRC) contention was that the assignment was designed to exploit the UK-Ireland double tax treaty to avoid UK withholding tax on the interest payments. However, the tribunal found that the assignment did not have the main purpose of taking advantage of the treaty, thus upholding BLM’s position.

Jake Landman, tax law expert at Pinsent Masons, said: “The decision will be a relief for participants in the secondary debt market. If HMRC had succeeded with certain arguments this would likely have an impact on sales of debt from a seller in a non-treaty jurisdiction to a purchaser in a treaty jurisdiction where the sale price reflects some of the tax arbitrage available to the purchaser.”

The First-tier Tribunal (FTT) had set out some principles for assessing the ‘main purpose’ of an assignment. These principles were accepted by the Upper Tribunal.

According to the FTT, determining the ‘main purpose’ must be based on evidence, with a subjective approach taken with consideration to the parties concerned, such as the assigning company and the purchaser. However, ‘main purpose’ cannot be determined solely by reference to the subjective intentions of the parties.

The FTT held that subconscious motives are capable of amounting to ‘purposes’. However, the term ‘main purpose’ carries with it some importance and must be more than incidental. There can be a range of purposes for a transaction, without all of these purposes being considered ‘main’.

The FTT concluded that HMRC have the burden of proof as to whether the anti-abuse provision under Article 12 of the UK-Ireland double tax treaty applies.

The FTT held that the Cayman company had the sole purpose of realising the best possible price from the assignment. The Upper Tribunal upheld this despite HMRC trying to link the profit to the UK withholding tax advantage available to BLM as a result of the double-tax relief.

The Upper Tribunal upheld the FTT’s conclusion that there was no issue where the seller wanted to assign a debt for the highest price.

Robert Dever, Dublin-based corporate tax law expert at Pinsent Masons, said: “The Upper Tribunal’s consideration of the anti-abuse measure in Article 12 of the double tax treaty between Ireland and the UK will certainly be of interest to Irish taxpayers and advisors alike. The recent and anticipated decisions of the UK courts, which are of persuasive authority in Ireland, relate to the main purpose test which will also assist in informing the position with respect to equivalent tests in various parts of the Irish tax code which often lack much Irish authority.”

“It is possible HMRC will attempt to appeal to the Court of Appeal which, in a string of recent cases, has been considering assessment of main purpose in other tax contexts,” said Landman.