The UK’s foreign income dividend (FID) regime was held to be in breach of TFEU article 63 in Test Claimants in the FII Group Litigation (C-446/04) (‘FII ECJ 1’). The CJEU’s recent judgment in relation to proceedings between the trustees of a pension scheme and HMRC (The Trustees of the BT Pension Scheme v HMRC (Case C-628/15), reported in last week’s edition) further clarifies the implications of the FID regime being contrary to EU law, and in particular the rights of shareholders affected by the FID regime. The CJEU followed the advocate general in its answers to the questions referred.
The CJEU concluded that shareholders who had received FIDs had rights pursuant to article 63, and were entitled to a remedy for breach of that article. Under the FID regime, shareholders did not receive a tax credit in respect of ACT paid by the parent company on distribution of a FID when such a tax credit was available in respect of dividends paid out of income from a UK source. This put those shareholders in a worse position if they received FIDs than if they received dividends paid from income with a UK source, as they would receive a tax credit entitling them to a payment from HMRC in relation to the latter but not the former even though FIDs had to carry credit for foreign tax up to the UK rate.
Further, the CJEU considered that it was irrelevant that the trustees were not subject to income tax in respect of dividends received by them and that the referring court did not consider that the infringement of EU law was sufficiently serious to give rise to non-contractual liability by the member state in favour of the companies distributing the dividends.
The CJEU also concluded that the fact that a company distributing dividends may have increased the amount of its dividends to make up for the lack of a tax credit would not lead to double recovery if shareholders could claim the tax credit from HMRC. This was for two reasons. First, FII ECJ 1 had previously concluded that companies increasing their dividends for that reason could not bring a claim for the increased amount because the increase was the result of their own decision making. However, the fact that shareholders were not entitled to a tax credit in respect of FIDs was not the result of their own decision, but the relevant legislation. Second, an increase in the amount of dividends could not be equated with the grant of a tax credit. The rights and obligations of HMRC were therefore unaffected by the amount of dividends the parent company chose to distribute to its shareholders.
Simon Whitehead & Katherine Blatchford, Joseph Hage Aaronson
The UK’s foreign income dividend (FID) regime was held to be in breach of TFEU article 63 in Test Claimants in the FII Group Litigation (C-446/04) (‘FII ECJ 1’). The CJEU’s recent judgment in relation to proceedings between the trustees of a pension scheme and HMRC (The Trustees of the BT Pension Scheme v HMRC (Case C-628/15), reported in last week’s edition) further clarifies the implications of the FID regime being contrary to EU law, and in particular the rights of shareholders affected by the FID regime. The CJEU followed the advocate general in its answers to the questions referred.
The CJEU concluded that shareholders who had received FIDs had rights pursuant to article 63, and were entitled to a remedy for breach of that article. Under the FID regime, shareholders did not receive a tax credit in respect of ACT paid by the parent company on distribution of a FID when such a tax credit was available in respect of dividends paid out of income from a UK source. This put those shareholders in a worse position if they received FIDs than if they received dividends paid from income with a UK source, as they would receive a tax credit entitling them to a payment from HMRC in relation to the latter but not the former even though FIDs had to carry credit for foreign tax up to the UK rate.
Further, the CJEU considered that it was irrelevant that the trustees were not subject to income tax in respect of dividends received by them and that the referring court did not consider that the infringement of EU law was sufficiently serious to give rise to non-contractual liability by the member state in favour of the companies distributing the dividends.
The CJEU also concluded that the fact that a company distributing dividends may have increased the amount of its dividends to make up for the lack of a tax credit would not lead to double recovery if shareholders could claim the tax credit from HMRC. This was for two reasons. First, FII ECJ 1 had previously concluded that companies increasing their dividends for that reason could not bring a claim for the increased amount because the increase was the result of their own decision making. However, the fact that shareholders were not entitled to a tax credit in respect of FIDs was not the result of their own decision, but the relevant legislation. Second, an increase in the amount of dividends could not be equated with the grant of a tax credit. The rights and obligations of HMRC were therefore unaffected by the amount of dividends the parent company chose to distribute to its shareholders.
Simon Whitehead & Katherine Blatchford, Joseph Hage Aaronson
.jpg?sfvrsn=335a554c_0 "300 x 250 (MPU)")