Storyboard for

1. EU Tax Case Update Storyboard for

2. …clear thinking

3. By completing this module you will be able to: List five recent cases dealing with various issues Describe the facts of each case Explain the law and the rationale applied to each decision Describe the comments arising out of each decision At the end, you can visit useful Internet sites on a “Web Ride” Lecturer: Tony Jenkins Learning time: approx. 20 min How to use this learning module? - Click on "Help" in the Table of Contents (TOC) European Union Tax Case Update Graphic: [presenter or standard graphic]

4. Test Claimants in the FII Group Litigation v HMRC Case C-35/11 – Tax treatment of dividends HMRC v Philips Electronics UK Ltd Case C-18/11 – Consortium relief Field Fisher Waterhouse LLP v HMRC Case C-392/11 – Service charges included in lease agreement Littlewoods Retail case (Case C-591/10) – Compensation interest: simple or compound? Wheels Common Investment Fund Trustees Ltd and others v HMRC, Case C-424/11 – management of defined benefit pension funds Cases considered Graphic: [European Court of Justice]

5. In 2006 the ECJ held that the UK rules on the taxation of dividends received from resident companies (exemption) compared to the taxation of dividends received from foreign companies (imputation of underlying tax for shareholdings of more than 10%) were not contrary to EU law provided that the tax rate applied to foreign-sourced dividends was not higher than the rate applied to domestic dividends The High Court asked the ECJ to clarify: Whether the test should be made by reference to effective rates or nominal rates ECJ’s ruling that where a UK company received a foreign dividend on which foreign tax had been paid, it should have received a credit for that foreign tax to offset against any ACT liability on its own dividends paid 1. Test Claimants in the FII Group Litigation v HMRC Case C-35/11 Graphic: [ Monopoly Chance card Bank pays you dividend]

6. Whether the ECJ ruling was limited to the situation in which the resident company receiving dividends from a non-resident company paid the ACT itself, or whether it also applied in the situation in which that resident company made a group income election Whether the ruling applied also to dividends received from subsidiaries resident in third countries 1. Test Claimants in the FII Group Litigation v HMRC Case C-35/11 (cont) Graphic: [HRMC logo]

7. The correct approach was to look at the effective rate of tax rather than the nominal rate of tax - The difference in treatment was precluded by articles 49 (freedom of establishment) & 63 (freedom of movement of capital) Treaty on the Functioning of the EU The 2006 ruling also applied irrespective of: the level at which the foreign tax had been paid which UK company had paid the ACT Where a company had a shareholding in a third country it could rely upon article 63 TFEU in order to call into question the consistency of the tax treatment of dividends originating in the third country - this applied irrespective of the size of the shareholding The 2006 ruling did not apply to subsidiaries established in other Member States to which ACT could not be surrendered and which were not subject to tax in the UK 1. Test Claimants in the FII GL – The decision Graphic: [a calculator]

8. The ECJ has found in favour of the taxpayers in its second judgment relating to the Franked Investment Income group litigation Many successful UK businesses consider expanding overseas for new customers, increased sales and, hopefully, increased profits However, expanding overseas will also mean that a UK company will have to consider for the first time not only the tax rules in another country but also how those rules interact with the UK tax rules Although a company will want to pay its fair share of tax in each country, it will want to ensure that it is not suffering any double taxation as a result of moving overseas 1. Test Claimants in the FII GL – Commentary Graphic: [UK flag and a variety of other European flags]

9. Philips Electronics UK Ltd was part of the Philips group, whose ultimate parent company was established in The Netherlands Parent company joint ventured with a South Korean group, LG Electronics The joint venture had a Dutch subsidiary (LGPD) which had a branch in the UK Philips Electronics UK Ltd claimed group relief for losses suffered by the UK branch of LGPD in the years 2001 to 2004 HMRC rejected the claim - the losses of the branch could be set against the company’s profits in the Netherlands If tax relief for partof the loss may be available in a foreign jurisdiction then s403D(1)(c) Income and Corporation Taxes Act 1988 provides that none of the loss can be surrendered 2. HMRC v Philips Electronics UK Ltd Case C-18/11 Graphic: [Philips logo]

10. The ECJ ruled that it was a restriction on the freedom of establishment of a non-resident company to establish itself in another state if the possibility of surrendering branch losses was subject to the condition that those losses could not be used for the purposes of foreign taxation, where a transfer of losses by a resident company was not subject to that condition Such a restriction could not be justified by the objective of preventing the double use of losses or the objective of preserving a balanced allocation of the power to impose taxes between the Member States The ECJ added that it was irrelevant that the claimant company had not itself exercised the freedom of establishment Accordingly, the offending legislation had to be disapplied 2. HMRC v Philips Electronics UK Ltd – The decision Graphic: [a gavel]

11. The ECJ has ruled that group relief conditions which prevented the surrender of losses from a UK branch to a UK subsidiary contravened EC law While the appeal was awaiting hearing in the Upper Tribunal, a deficiency regarding link companies (the legislation regarding s406(2) ICTA) was amended to allow link companies in a consortium if they are established in the EEA The new rules can be found in ss130-134 CTA 2010 2. HMRC v Philips Electronics UK Ltd – Commentary Graphic: [map of the EEA]

12. FFW leased offices in London The lease provided that the premises were let in consideration of the payment of three ‘rents’ The landlord had not exercised its right to opt for taxation of the leasing of the premises which meant that it was exempt from VAT and the landlord also treated the supplies of services as exempt from VAT FFW took the view the supplies of services were taxable and made an application to HMRC for a refund of VAT which was rejected The principal question was whether the services provided by landlords under a lease agreement with their tenants should be regarded as an element of a single exempt supply of a lease of land 3. Field Fisher Waterhouse LLP v HMRC Case C-392/11 Graphic: [picture of FFW offices (see below for a link)]

13. A further issue was how relevant was it that the services could be supplied by persons other than the landlords, albeit that under the terms of the present leases in question the tenants had no choice but to receive the services from the landlords Also in determining whether there is a single supply, was it relevant that a failure by the tenant to pay the service charge would entitle the landlord not only to refuse to provide the services but also to terminate the lease agreement with the tenant? 3. Field Fisher Waterhouse LLP v HMRC Case C-392/11 (cont) Graphic: [3 ply rope]

14. The mere fact that a supply was included in a lease was not in itself decisive If a lease were to provide for the inclusion of supplies which by their nature could not objectively be regarded as indivisible from or ancillary to the principal supply, but were independent of it, those supplies would not form part of a single supply of the leasing of immovable property, exempt from VAT The possibility that elements of a single supply could be supplied separately was inherent in the concept of a single composite transaction 3. Field Fisher Waterhouse – The decision Graphic: [leather plait (made from 3 strands)]

15. The ECJ ruled that the leasing of immovable property and the supplies of services linked to that leasing could constitute a single supply The fact that the lease gave the landlord the right to terminate it if the tenant failed to pay the service charges supported the view that there was a single supply, but did not necessarily constitute the decisive element It was for the referring court to determine whether, in the light of the interpretative guidance provided by the Court and having regard to the particular circumstances of the case, the transactions in question were so closely linked to each other that they had to be regarded as constituting a single supply of the leasing of immovable property 3. Field Fisher Waterhouse – The decision (cont) Graphic: [plaited bracelet]

16. The ECJ has ruled that the question of whether service charges included in a lease agreement should follow the treatment of the lease is a matter for national courts 3. Field Fisher Waterhouse - Commentary Graphic: [a ripple on a pond]

17. The ECJ held in the Littlewoods Retail case (Case C-591/10) that a taxable person, who had overpaid VAT which was collected contrary to EU legislation on VAT, had a right to reimbursement of the tax with interest It was for national law to determine, in compliance with the principles of effectiveness and equivalence, whether the principal sum had to bear simple interest, compound interest or another type of interest The ECJ said that the principle of effectiveness required that the national rules in the calculation of interest should not lead to depriving the taxpayer of an adequate indemnity for the loss occasioned through the undue payment of VAT The issue will now return to the High Court to rule which type of interest the ‘indemnity’ relates to (Littlewoods has already received £268m of simple interest on a principal amount of £205m, covering a period of 30 years) 4. The Littlewoods Retail case (Case C-591/10) Graphic: [Littlewoods logo]

18. Wheels was the trustee of a fund which pooled the assets of final salary pension schemes established by the Ford Motor Company Fund management services were provided to Wheels by Capital International Ltd which charged VAT on those services In Sep 2007 the ECJ decided that the management of investment trust companies (ITCs) was exempt from VAT Following that decision, a number of claims were made for the repayment of the VAT accounted for in respect of the supplies to trustees of defined benefit occupational pension schemes 5. Wheels Common Investment Fund Trustees Ltd and others v HMRC, Case C-424/11 Graphic: [Ford logo]

19. The issue was whether the services were exempt by virtue of article 135(1)(g) of the 2006 Directive and article 13B(d)(6) of the Sixth Directive being the ‘management of special investment funds as defined by Member States’ The claims were rejected by HMRC on the basis that defined benefit occupational pension schemes were not special investment funds A number of test cases were heard by the First-tier Tribunal (TC01381) which referred the issue to the ECJ 5. Wheels Common Investment Fund Trustees Ltd and others v HMRC, Case C-424/11 (cont) Graphic: [piggy bank with EU stars on]

20. The ECJ decided that that: an investment fund pooling the assets of a retirement pension scheme was not a ‘special investment fund’ the members of the scheme did not bear the risk arising from the management of the fund, and the contributions which the employer paid into the scheme were a means by which they complied with their legal obligations towards their employees 5. Wheels – The decision Graphic: [a judge]

21. A defined benefit pension fund was not a ‘special investment fund’ Accordingly, fund management services were not exempt from VAT The extent to which the decision applies to defined contribution schemes is unclear 5. Wheels - Commentary Graphic: [a pension fund manager]

22. The key things to remember from this module are: The decision in favour of the taxpayers in its second judgment relating to the Franked Investment Income group litigation The ability to use the losses in the Philips case The rationale for decision in the national courts in the FFW case The treatment of compensation interest in the Littlewoods case The treatment of costs in the Wheels case Summary Graphic: [standard summary graphic]

23. Web Ride

24. …clear thinking

25. Please select the correct answer(s) and then click on “Submit” Which of the following is true? In the Test claimants FII case, the correct approach was to look at the effective rate of tax rather than the nominal rate of tax In the Test claimants FII case, the correct approach was to look at the nominal rate of tax rather than the effective rate of tax In the Philips case, the ECJ ruled that it was a restriction on the freedom of establishment of a non-resident company to establish itself in another state if the possibility of surrendering branch losses was subject to the condition that those losses could not be used for the purposes of foreign taxation In the Philips case, the ECJ ruled that it was not a restriction on the freedom of establishment of a non-resident company to establish itself in another state if the possibility of surrendering branch losses was subject to the condition that those losses could not be used for the purposes of foreign taxation Question 1

26. Please select the correct answer(s) and then click on “Submit” Which of the following is true? In the FFW case, the ECJ ruled that the leasing of immovable property and the supplies of services linked to that leasing did not constitute a single supply In the FFW case, the ECJ ruled that the leasing of immovable property and the supplies of services linked to that leasing could constitute a single supply In the Littlewoods case, it was for national law to determine, in compliance with the principles of effectiveness and equivalence, whether the principal sum had to bear simple interest, compound interest or another type of interest In the Littlewoods case, the ECJ determined that only simple interest was payable Question 2

27. Please select the correct answer(s) and then click on “Submit” Which of the following is true? In the Wheels case, the ECJ decided that an investment fund pooling the assets of a retirement pension scheme was not a ‘special investment fund’ In the Wheels case, the ECJ decided that that an investment fund pooling the assets of a retirement pension scheme was a ‘special investment fund’ In Sep 2007 the ECJ decided, in the case of JP Morgan Fleming Claverhouse (Case-363/05), that the management of investment trust companies (ITCs) was exempt from VAT on the basis that the UK treated unit trusts and Open Ended Investment Companies as eligible for this exemption In the FFW case, it was for the referring court to determine whether, in the light of the interpretative guidance provided by the Court and having regard to the particular circumstances of the case, the transactions in question were so closely linked to each other that they had to be regarded as constituting a single supply of the leasing of immovable property Question 3

28. Now you have finished this module and acquired basic knowledge on recent EU tax cases If you answered all the questions in the Quiz correctly, you can print out your personal certificate by clicking on the link Thank you for your attention! Finish Graphic: [standard finish graphic]