Facts
Supreme Court
Court of Appeal
Comment

In Skatteforvaltningen v Solo Capital Partners,(1) the Court of Appeal inquired at length into the application of Rule 3(1) of Dicey, Morris & Collins on conflict of laws (edition 15) (Dicey Rule 3), which provides that English courts have no jurisdiction over “the enforcement, directly or indirectly, of any criminal, fiscal or other public law of a foreign state”. The Court decided that the claim of the Danish tax authorities did not fall under the Dicey rule 3 because it concerned the restitution of sums embezzled by fraud rather than the execution of a tax.

Facts

This case was an appeal by the Danish Revenue Authority (SKAT) to recover £1.44 billion of Danish withholding tax refunds, which it had paid to the defendants. Companies domiciled in Denmark are taxed at source on dividends, which can be reimbursed by SKAT to foreign shareholders in the countries concerned in which double taxation treaties exist. But a dividend arbitrage scheme known as “cum-ex” took advantage of loopholes in the stock lending and settlement processes to make it appear there were multiple stock owners, all entitled to the same reimbursement of withholding tax, thus prompting SKAT to pay an amount greater than the withholding tax actually collected on each share. There are currently a number of proceedings involving a withholding tax due to the cum-ex fraud sweeping Europe.

It was alleged that the defendants conspired in the cum-ex business schemes to induce SKAT to pay refunds. SKAT alleged that the reimbursements it made under the scheme were induced by fraudulent representations that each of the reimbursement claimants was, at the relevant time, a shareholder of Danish companies, when in fact they were not. This would mean that the refund claimants did not receive the dividends from the shares of the Danish companies from which the withholding tax was deducted, meaning there was no withholding tax payment to be refunded. by SKAT. SKAT sued the defendants for, among other things, deception, fraudulent misrepresentation, conspiracy of unlawful means, dishonest receipt and knowing receipt.

Supreme Court

The preliminary issue regarding the application of Dicey Rule 3 to SKAT’s claim was heard in March 2021. At trial, Andrew Baker J found that all of SKAT’s claims were barred by Dicey Rule 3. He held noted that whether the rule applied was “a question of characterization” and that two particular types of claims specific to foreign income would fall within the scope of Dicey’s Rule 3:

• if the request was to enforce Danish tax law (Government of India(2) applied); Where
• whether the claim amounted to an attempted extraterritorial exercise of sovereign power (Mbasogo v Logo(3)).

These characterizations are called the “recipe rule” and the “sovereign powers rule”, respectively.

The judge ruled that it was a claim to enforce Denmark’s sovereign right to tax and was therefore not admissible in the English courts as it fell under the ‘income rule’ according to the analysis in Government of India. He held that in this case, the object of SKAT’s claim was to “enforce this sovereign right” to impose and enforce its right to retain the withholding tax rather than refund it to the defendants. , even though SKAT had argued private causes of action rather than those of tax law.

SKAT appealed this decision on the grounds that its claim did not fall within the scope of Dicey’s Rule 3 because the scope of the claim was broader than the simple application of a taxing right.

Court of Appeal

Composed of Sir Julian Flaux, Phillips LJ and Stuart-Smith LJ, the Court of Appeal allowed the appeal. He agreed with Andrew Baker J that the Dicey Rule 3 did not allow the enforcement of a tax claim due in the English courts (the tax rule), nor a claim involving the exercise of a sovereign right (the powers sovereigns to reign). It therefore had to determine whether the purpose of this request was to recover foreign revenue.

According to the Court of Appeal’s analysis, the claim was not to recover revenue for the following reasons:

• The purported shareholders had never been liable for the withholding tax to SKAT, as they had in fact never been shareholders of eligible companies.
• The funds that SKAT had paid to the defendants were not a tax refund, but a “deduction from SKAT funds”, in the same way as if the funds had been stolen from SKAT.
• The claim was therefore not a claim for tax recovery but a claim for relief in the event of fraud, and although Danish tax law issues would inevitably be analyzed in detail at trial, that did not mean that the claim was automatically converted into a revenue request according to Dicey’s rule 3.
• Also, there was no tax owed by defendants or purported shareholders, which was the basis of the income rule historical case classification.

With respect to the sovereign powers rule, the Court found that SKAT was not enforcing a sovereign right by suing to recover sums misappropriated due to fraudulent misrepresentation. This was an action that any victim of fraud would be entitled to take and, in any event, there was no taxpayer/tax authority relationship between SKAT and the defendants to invoke sovereign power. Dicey’s rule 3 therefore did not apply in this case.

Comment

The Court of Appeal took this opportunity to draw a stark contrast between the taxing authority of a foreign state attempting to enforce its right to collect unpaid tax in the English courts and a claim for relief for fraud. Historical authorities on the question of the operation of the Dicey Rule 3 have tended to be based on claims where unpaid tax was due – indeed Andrew Baker J at trial observed that there is no authority over this rule when a tax authority attempts to recover a tax refund paid in error.

Foreign tax and customs authorities may well view this relatively untraveled (albeit niche) avenue with interest, as the Court of Appeal ruling clarifies the claims under tax law in which English courts can establish jurisdiction and narrowed the scope of Dicey Rule 3 further than the High Court had originally been prepared to do. Following the decision of the Court of Appeal (and subject to any further appeal to the Supreme Court), the proceedings will continue to trial in the High Court as one of the most significant fraud claims currently. ongoing in that jurisdiction.

For more information on this subject, please contact Alain Williams or Poppy St John at RPC by phone (+44 20 3060 6000) or email ([email protected] Where [email protected]). RPC’s website can be accessed at www.rpc.co.uk.

Endnotes

(1) Skatteforvaltningen (Danish customs and tax divisions) v Solo Capital Partners LLP (in special administration) [2022] EWCA Civil 234.

(2) Government of India v Taylor [1955] AC 491.

(3) Mbasogo v Logo Ltd (#1) [2006] EWCA Civil 1370.