The Upper Tribunal has held that the nondiscrimination article in the UK/US double tax treaty overrode the UK domestic provisions in question (the pre-2000 group relief rules) as these were capable of operating in a cross-border context without the restrictions on the nationality of the parent company which these provisions then contained.
Pre-2000 UK group relief provisions discriminated on the grounds of nationality
In this case, FCE Bank wished to claim loss relief from its sister company, FMCL. However, although both companies were UK resident and all other requirements for the surrender of group relief were met, the companies' common 75 per cent parent was US resident and, pre-2000, the UK group relief legislation did not allow companies to trace their ownership through non-UK resident companies for the purposes of establishing a qualifying group relationship.
FCE Bank argued that this legislation was in breach of the non-discrimination article of the UK/US double tax treaty which provided:
"Enterprises of a Contacting State, the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State, Shall not be subjected in the first-mentioned Contracting State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected."
The Tribunal determined that the sole reason for the refusal of group relief was the foreign ownership or control of the companies seeking to surrender and receive the group relief; the parent company being resident in the US, rather than the UK. Accordingly, the UK group relief rules breached and were overridden by the treaty and relief was allowed.
Boake Allen case on ACT distinguished
In Boake Allen, the non-discrimination articles of the relevant double tax treaties did not override the UK's domestic legislation relating to group income elections for ACT.
The distinction made by the Tribunal was that a group income election was a joint decision between two entities, the consequence of which was to shift the responsibility for the ACT to the other party. This could not apply where, as on the facts of Boake Allen, one of the companies was not liable for the tax by reason of not being UK tax resident. In other words, the provision was not capable of meaningful application in a cross-border context. In the context of establishing group relationships for the purposes of the pre-2000 group relief rules, however, there was no need for the parent company (or any other link company in the ownership chain) to be subject to UK tax for the legislation to operate effectively.
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