Key Facts
- •GEFI Ltd, a UK resident company, claimed double taxation relief for US federal income tax paid on interest income.
- •GEFI Ltd's shares were 'stapled' to those of a US affiliate, resulting in GEFI Ltd being treated as a US domestic corporation for US federal tax purposes.
- •HMRC denied the relief claims, leading to an appeal.
- •The total amount of relief denied was £124,913,161.86, with additional interest accrued.
- •The FTT dismissed the appeal, leading to a further appeal to the Upper Tribunal.
Legal Principles
Interpretation of double tax conventions requires good faith, consideration of ordinary meaning within context, and the treaty's object and purpose.
Article 31 of the 1969 Vienna Convention on the Law of Treaties; Irish Bank Resolution v HMRC [2020] EWCA Civ 1128; Fowler v HMRC [2020] UKSC 22; HMRC v Anson [2015] UKSC 44
For treaty purposes, 'resident of a Contracting State' means any person liable to tax therein by reason of domicile, residence, citizenship, place of management, place of incorporation, or any similar criterion, excluding those liable only for income from sources within that state.
Article 4(1) UK/USA Double Tax Convention
The meaning of 'business' in the UK/USA Double Tax Convention is determined by reference to UK tax law, specifically income tax, corporation tax, and capital gains tax.
Article 3(2) of the 2000 OECD model convention; Article 3(2) UK/USA Double Tax Convention
A company's gainful use of assets prima facie constitutes carrying on a business, though not every isolated act authorized by its memorandum constitutes carrying on a business. The carrying on of business usually requires some activity, though this may be intermittent.
American Leaf Blending Co Sdn Bhd v Director-General of Inland Revenue [1979] AC 676; Jowett v O'Neill and Brennan Construction Ltd [1998] STC 482; Revenue and Customs Commissioners v Salaried Persons Postal Loans Ltd [2006] EWHC 763 (Ch)
Outcomes
Appeal allowed.
The Upper Tribunal found that GEFI Ltd was resident in the USA for the purposes of the UK/USA Double Tax Convention because the share stapling arrangement, which resulted in GEFI Ltd being treated as a US domestic corporation for tax purposes, constituted a 'criterion of a similar nature' to the other criteria listed in Article 4(1) for establishing residence. The Tribunal rejected HMRC's argument that a 'territorial connection' was required beyond the imposition of 'full' taxation.
FTT's decision on whether GEFI Ltd carried on business in the USA upheld.
The Upper Tribunal found that the FTT correctly applied relevant legal principles, even if not explicitly stated, in determining that GEFI Ltd's activities did not constitute carrying on a business in the USA. The Tribunal noted that GEFI Ltd acted largely as a passive investor in the limited partnership and the limited activity did not meet the criteria for a business under UK tax law.