Upper Tribunal confirms that anti-abuse provision in UK/Ireland double tax treaty did not apply

In HMRC v Burlington Loan Management DAC [2024] UKUT 152 (TCC), the Upper Tribunal (UT) held that the anti-abuse rule in the UK/Ireland double tax treaty (DTT) did not apply.

Background

In 2018, Burlington Loan Management DAC (BLM), an Irish company, acquired a debt claim from SAAD Investments Company Ltd (SICL), a company resident in the Cayman Islands, entitling BLM to yearly interest payments in the administration of Lehman Brothers International (Europe) (LBIE). LBIE was a company resident in the UK, where non-UK resident companies are subject to income tax on UK-sourced interest, with payers like LBIE required to withhold 20% tax (subject to any applicable double tax convention). 

The UK/Cayman Islands DTT would have made the interest subject to the UK's domestic tax provisions. Relief from double taxation under the treaty means that the Cayman Islands would give a credit for the UK tax against any Cayman Islands tax chargeable in respect of the same interest. However, SICL would still have been subject to a tax cost of at least 20% of the interest.

Conversely, the UK/Ireland DTT stipulates that interest derived and beneficially owned by a resident of a contracting state is taxable only in that state. Once the SICL claim was assigned to BLM, it was beneficially owned by it and, as an Irish resident, the interest was only taxable in Ireland. At the relevant time, trading income was subject in Ireland to a corporation tax rate of 12.5% while a higher rate of 25% applied to income from an excepted trade and to non-trading income.

However, if Article 12(5) of the UK/Ireland DTT, an anti-abuse measure, applies, both countries retain taxing rights, subjecting the interest to both UK and Irish taxes with credits available. Article 12(5) states:

"The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this article by means of that creation or assignment".

If the anti-abuse measure applied in the present case, BLM would be subject to a cost of at least 20% of the interest.

BLM applied to HMRC for an income tax refund on the basis that it was resident in Ireland and entitled to full relief from UK tax on interest under Article 12 of the UK/Ireland DTT. HMRC denied the refund, asserting that Article 12(5) applied. BLM appealed to the First-tier Tribunal (FTT).

FTT decision

The appeal was allowed.

The FTT held that Article 12(5) did not apply to the assignment of the debt claim with the consequence that the interest was only to be taxed in Ireland. The FTT came to various conclusions including that:

• determining a person's 'main purpose' is a factual question, based on all relevant evidence and proper inferences;
• the anti-abuse provision focuses on the subjective purposes of the involved parties but is not limited to stated subjective intentions; it also considers subconscious motives, especially when consequences are inevitably linked to the action;
• inevitable consequences of the assignment of the debt were part of the factual context, but did not automatically indicate the purpose;
• a 'main purpose' implies significant importance, not just being more than trivial; and
• there can be several main purposes for an action.

HMRC appealed to the UT.

UT decision

The appeal was dismissed.

The FTT had found that the parties' sole purpose in entering into the assignment was profit realisation for BLM and achieving the best price for SICL, not abusing the UK/Ireland DTT. BLM expected to benefit from Article 12 'in the normal way'. The UT held that the FTT had rightly considered the broader context, including that HMRC had not challenged similar claims by BLM before. The UT agreed that Article 12(5) did not apply just because of the seller’s awareness of the buyer’s identity. Overall, the UT found that the FTT's evaluative findings came within a reasonable range of conclusions it was entitled to reach.

Comment 

This decision will be welcome news to secondary debt markets. It confirms that the anti-abuse provision in Article 12(5) of the UK/Ireland DTT does not necessarily apply to debt sales simply because the pricing makes an allowance for the fact that potential buyers could benefit from the withholding exemption. It should not be controversial that unconnected buyers and sellers can agree to pay less than 100% of the value of interest if the buyer can benefit from a withholding exemption and the seller cannot, otherwise it would not be profitable for either party to trade with the other party.

This decision confirms, contrary to HMRC’s view, that  withholding tax arbitrage is not sufficient, in itself, to constitute treaty abuse, as allocating taxing rights over the interest to the jurisdiction of the buyer is consistent with the purpose of the treaty, which should be considered from the perspective of both treaty partners and not just the perspective of the UK.

The decision can be viewed here.