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<b>Tax News:</b> Pirelli lose on group income elections. By Nichola Ross Martin

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10th Feb 2006
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The House of Lords has found in favour of HMRC in a long running case in which Pirelli Cables attempted to reclaim ACT under double taxation conventions - Pirelli Cable Holding NV and others v Inland Revenue Commissioners [2006] UKHL 4.

The case centred on the application of two double taxation conventions which were primarily designed to avoid double taxation of distributable profits between the company and its shareholders. Pirelli had attempted to avoid payment of ACT by making a group income election under s.247 ICTA 1988 in respect of dividends paid by a UK subsidiary to its parent companies in the Netherlands and Italy.

The Lords decided that if a group of companies elected to avoid advance corporation tax by making a group income election it could not also be entitled to tax credits under double taxation conventions, and any tax credits received had to be taken into account in assessing compensation payable. This followed the earlier decision of the European Court of Justice in Metallgesellschaft Ltd v HMRC (Joined Cases C-397/98 and 410/98) [2001] Ch 620 ('the Hoechst decision').

Under art 10(3)(c) of double taxation conventions with the Netherlands and Italy the parent companies, who being resident abroad were not entitled to tax credits under s 231 of the 1988 Act, had been entitled to 'convention tax credits' of a reduced amount. The European Court of Justice in the Hoechst decision had ruled that denial of the right to make a group income election where parent companies were not resident in the United Kingdom was contrary to art 52 (now 43) of the EC Treaty and that companies were entitled to compensation for the loss of use of money paid as ACT.

On the assessment of compensation, the key issue were.

# Whether, if the United Kingdom legislation had permitted group income elections and such elections had been made, the parent companies would have been entitled to the tax credits they had received under the conventions. The Lords found that a group could not elect to avoid payment of ACT by a group income election and remain entitled to a tax credit. That would put a non-resident parent in a better position than a resident parent and be contrary to the stated purpose of art 10(3)(c) of the conventions.

# Whether, even if the parent companies had not been entitled to the tax credits, they should be left out of account in assessing compensation because, as the claimants contended, a subsidiary and its parent were separate legal entities. The claimants were again seeking to have the best of both worlds. Assessment of the overall loss suffered by the group was the only fair way of assessing the loss suffered where a subsidiary and its parent had been denied the opportunity of a single fiscal package.

The claimants, relying on passages in other judgments by the European court, contended that ACT constituted a withholding tax within art 5(1) of Council Directive 90/435/EEC, but the terms of art 7(1), coupled with the decision in Oce van der Grinten NV v CIR [2003] STC 1248 and passages in the Hoechst decision, established that ACT fell within art 7(1) and was not a withholding tax.

www.rossmartin.co.uk

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