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Treaty between the United Kingdom and Switzerland – UK Court of Appeal decides on non-discrimination relief — Orbitax Tax News & Alerts

On 21 February 2007, the UK Court of Appeal gave judgment in the case of Revenue and Customs v UBS AG [2007] EWCA 119 concerning the claim of the UK branch of a Swiss resident company under section 243 Income and Corporation Taxes Act 1988 (ICTA) to payment of a sum equal to the tax credit on UK dividends received by the branch. The facts are as stated in the report of the decision of the Special Commissioner [2005] UKSPC 00480 dismissing the claim, against which the taxpayer appealed.

The High Court allowed the appeal on the grounds that the tax credit claimed by the taxpayer constituted a tax credit under section 231 ICTA, which is extended to non-UK resident companies by virtue of section 788(3)(d) ICTA.

Three issues were argued before the Court of Appeal:


whether the payment of the tax credit is part of the levying of taxation for the purposes of Art. 23(2) of the UK-Switzerland income tax treaty dated 8 December 1977;

-   whether the claim for payment of the tax credit was a relief from corporation tax for the purposes of the provisions of section 788(3)(a) ICTA (which incorporate certain provisions of UK tax treaties into UK domestic law); and
-   whether relief under section 243 ICTA is a right to a tax credit under section 231 ICTA.

On the first issue, two of the judges reached differing conclusions, while the third judge did not find it necessary to express an opinion. Moses LJ took the view that taxation had been less favourably levied on the taxpayer contrary to the treaty. Arden LJ considered that, for the purposes of Art. 23(2), "the taxation" refers to the tax payable on the profits chargeable to tax less any relief or allowance which reduces it - but not to the tax credit claimed by the taxpayer in this case on the basis that the credit does not reduce the charge to tax. Moreover, this conclusion was said to be consistent with the exclusion of permanent establishments from the right to claim the tax credit on UK dividends provided by Art. 10(3)(c) of the treaty.

In any event, all three judges agreed on the second and third issues. The taxpayer's claim to utilize tax credits did not constitute a relief against corporation tax because the claim did not convert the dividend income into profits chargeable to corporation tax. It was also clear that relief under section 243 ICTA was not contemplated by the treaty; the only entitlement to a dividend tax credit was conferred by Art. 10(3)(c) and it was that provision that was given effect by section 788(3)(d) ICTA. Accordingly, even if the taxpayer had been taxed less favourably contrary to the treaty, no remedy was available under UK domestic law.