Q&A: Supreme Court finds for Danish tax authority
The Supreme Court has unanimously found in favour of the Danish tax authority (SKAT) in Skatteforvaltningen v Solo Capital Partners LLP and others [2023] UKSC 40. The court held that SKAT’s claims against various parties involved in the ‘cum-ex’ scandal were not inadmissible as a result of the revenue rule – essentially this is not an attempt to enforce Danish tax laws in the English courts. This means that the claims can proceed to a full trial (scheduled to start in April 2024).
What are the facts of this case?
The background to this case is the vast ‘cum-ex’ scandal which has hit many European jurisdictions, including Denmark. Broadly, this was a tax arbitrage scheme targeting legislative provisions which permitted non-resident shareholders to reclaim income tax withheld on dividend payments. In essence, cum-ex involved reclaiming withholding tax multiple times as the same shares were transferred rapidly between a group of investors with (cum) and without (ex) the right to dividends around the time of dividend payment dates. The claim in question is brought by SKAT in the English courts against a large number of defendants (currently 89). SKAT argues that (very broadly) the defendants fraudulently induced it to pay out refunds of Danish withholding tax (relating to dividend payments made by Danish companies) to recipients who were not entitled to them, in an aggregate amount of almost £1.5bn. A key point made by SKAT is that the refund applicants owned no shares in any Danish companies, received no dividends and suffered no Danish withholding tax. The defendants had argued that SKAT’s claims are inadmissible under the long-standing and widely-recognised ‘revenue rule’. This states ‘the English courts have no jurisdiction to entertain an action … for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign state’. In other words, the English courts will not (as a matter of common law) enforce or collect foreign taxes. This can effectively be overridden where there is an agreement made by treaty or convention (such as a double tax treaty (DTT) or the OECD Convention on Mutual Administrative Assistance in Tax Matters), but that was not relevant in this case. SKAT’s claims have given rise to a very large and complex piece of litigation. The arguments on the revenue rule were heard as a preliminary issue, with the main trial to follow. The High Court originally found in favour of the defendants and dismissed the claim on the basis that the revenue rule did apply. This was overturned by the Court of Appeal (CA) and then appealed to the Supreme Court.
What did the Supreme Court decide?
The Supreme Court agreed with SKAT’s arguments (and the CA) that the revenue rule did not apply to this case. The reasoning was that the claims are not claims for the direct or indirect enforcement of foreign tax laws. Rather they are essentially claims by a victim of an alleged fraud for repayment of sums which were taken from it. While the Danish tax system provided the context for the alleged fraud, the refund applicants were never Danish taxpayers – at no point were they under any liability to pay Danish tax. SKAT’s claim also did not rely on any Danish legislation giving rise to an obligation to repay the funds; rather it was put on the basis of common law causes of action in English law. This was, therefore, in line with the rationale of the revenue rule, in the sense that it does not involve any attempt to assert the sovereign authority of the state imposing the taxes (ie Denmark) within the territory of another. The claims are also consistent with the principle that the revenue rule does not prevent the English courts from recognising foreign tax laws (as opposed to enforcing them), provided that this does not otherwise conflict with public policy. The Supreme Court also rejected a secondary argument that the claims were inadmissible by virtue of the ‘sovereign authority rule’ – ie that an action for the enforcement, directly or indirectly, of a public law of a foreign state is inadmissible. It held that SKAT’s claims do not involve an act of a sovereign character; rather they are claims that would equally be open to any private citizen who alleges they have been defrauded in a similar way. The fact that SKAT had used ‘sovereign powers’ (ie mutual assistance agreements) to obtain information from other states regarding the claims was ‘at most, of merely peripheral significance’.
What are the practical implications of this case?
The impact of this decision is very significant. Most immediately, it means that SKAT’s claims can proceed to a full trial (scheduled to begin in April 2024 and last for many months). More generally, the Supreme Court has re-asserted that the revenue rule remains applicable. There are still clear and cogent reasons for its existence, even in the current era of increased international co-operation and mutual assistance in relation to tax collection and information exchange. It should always therefore be considered when there is any potential assessment and collection of tax in a cross-border context. However, the rule does have its limitations and its scope and application to a particular case needs to be carefully
considered in line with its purpose and rationale. For example, the fact that a foreign state’s tax system provides the context and background for a claim does not, of itself, mean that it will be inadmissible. Rather, it is necessary to consider closely the substance of the claim and whether it is an attempt directly or indirectly to enforce foreign tax laws. Finally, while this case arises out of particularly remarkable facts, other jurisdictions are affected by the ‘cum-ex’ scandal and
there is currently a more general crackdown on international tax evasion and non-compliance. It will be interesting to see if other tax authorities are encouraged by this decision and explore similar avenues to recover sums they consider are owed to them, whether in relation to the ‘cum-ex’ scandal or other issues.
This Q&A article was originally published by Taxation on 23 November 2023.
