[2010] UKFTT 136 (TC)
	
                                                                                                           TC00445
Appeal number: TC/2009/12324 

GROUP RELIEF – UK subsidiaries of US holding company – whether non-discrimination article of the US-UK double taxation agreement provides for relief between the UK subsidiaries – yes – appeal allowed 

FIRST-TIER TRIBUNAL

TAX 

	FCE BANK PLC	Appellant

	- and -

	THE COMMISSIONERS FOR HER MAJESTY’S
	REVENUE AND CUSTOMS	Respondents

		TRIBUNAL: 	JOHN F AVERY JONES CBE 
EDWARD SADLER (TRIBUNAL JUDGES)									

Sitting in public at 45 Bedford Square, London WC1 on 24 March 2010

John Gardiner QC and John Brinsmead-Stockham, counsel, instructed by Slaughter & May, for the Appellant

Ian Glick QC and David Ewart QC, counsel, instructed by the General Counsel and Solicitor to HM Revenue and Customs, for the Respondents

© CROWN COPYRIGHT 2010

DECISION

1.	This is an appeal against refusal of a group relief claim for the Appellant’s accounting period ending on 31 December 1994.  The issue in this appeal is whether (before the change in the law in 2000) the non-discrimination article in the US-UK double taxation agreement 1975 (scheduled to the Double Taxation Relief (Taxes on Income) (The United States of America) Order 1980 (“the Treaty”) has the result that group relief is available between two UK resident directly-held 75% subsidiaries of a US parent company in circumstances where it would be available if the parent company were UK resident.  The Appellant was represented by Mr John Gardiner QC and Mr John Brinsmead-Stockham and the Respondents (“HMRC”) by Mr Ian Glick QC and Mr David Ewart QC.
2.	There was an agreed statement of facts as follows:
A. Introduction
(1)	The appeal before the Tribunal is concerned with the availability of group claims for group relief for the purposes of corporation tax under Income and Corporation Taxes Act 1988 (“TA 1988”) Part X, Chapter IV (“the Group Relief Provisions”).  At all relevant times the claimant company (the Appellant: “FCE”) was a UK-resident company as was the surrendering company, Ford Motor Company Limited (“FMCL”).  HMRC deny that FCE was entitled to claim group relief, whilst FCE asserts that it was so entitled.
(2)	This appeal relates to FCE’s group relief claim in respect of its accounting period for the year ending 31 December 1994 (“FCE 1994”).  The appeal before the Tribunal (“the FCE 1994 appeal”) is a lead case in respect of a number of other appeals by FCE and other companies within the Ford corporate group.
(3)	FCE’s group relief claim for FCE 1994 was validly made, refused by HMRC and validly appealed.
(4)	HMRC refused FCE’s claim for group relief, on the basis that FCE and FMCL were not members of the same group during FCE 1994.  The only reason that HMRC refused FCE’s claim for group relief, in respect of losses surrendered by another UK-resident company, was that the shareholding relied upon to establish those companies as group companies was held by Ford Motor Company (“FMC”), a non-UK resident company.  FCE and FMCL otherwise satisfied all of the requirements to enable trading losses to be surrendered between them by means of a claim for group relief.
(5)	FCE claimed group relief of £538,521 for FCE 1994.  FMCL had trading losses in excess of that amount available for surrender for the period.  If the appeal is allowed, this representative claim alone will generate a repayment due to FCE of £177,712 (excluding interest).
(6)	Schedule 1 to this Statement of Agreed Facts gives details of the other appeals for which the FCE 1994 appeal is the lead case.  The result of the FCE 1994 appeal will be determinative of all of the other appeals for which it is the lead case.  The figures for the amounts of group relief claimed/losses surrendered, ACT displaced and repayments due to the appellant companies set out in paragraph 5 (above) and Schedule 1 are to be regarded as provisional as they have not been finally agreed between the parties.  The amounts included are the latest amounts claimed by the appellant companies.   
B.  Factual Summary
FCE 1994
(7)	Schedule 2 to this document [not reproduced] is a corporate structure chart for the Ford group companies for the whole of FCE 1994.
(8)	Throughout FCE 1994, FMC (the parent company), was resident in the US, and FMCL and FCE (the subsidiary companies) were both resident in the UK.
Beneficial ownership of ordinary share capital (TA 1988 s.413(3) and s.838(1))
(9)	Throughout FCE 1994, FMC had direct beneficial ownership of more than 75% of the ordinary share capital of both FCE and FMCL.  Consequently, throughout FCE 1994, both FCE and FMCL were “75 per cent subsidiaries” of FMC within the terms of TA 1988 s.838.
Profits and Assets (TA 1988 s.413(7) and Schedule 18)
(10)	Throughout FCE 1994, FMC was entitled to at least 75% of any profits available for distribution to equity holders of FCE and FMCL.  In addition, FMC would have been beneficially entitled to not less than 75% of any assets of those companies available for distribution to their equity holders on a winding-up by a liquidator.  The terms of TA 1988 s.413(7), as supplemented by TA 1988 Schedule 18, were thereby fulfilled.
Schedule 1
A.	Ford group appeals
The FCE 1994 appeal is a lead case in respect of a number of other appeals made by Ford group companies.  In all of the appeals (listed below) the original claims for group relief were validly made, were refused by HMRC and were validly appealed.  The claims and appeals were either made in time, or HMRC exercised their discretion to allow them to be made out of time.  The surrendering company in respect of each claim was FMCL.  The appellant companies making the claims were, at all relevant times, UK-resident companies, as was the surrendering company, FMCL.  In respect of all relevant periods, FMCL had sufficient trading losses available for surrender in order to satisfy the appellant companies’ claims for group relief.
A full list of the accounting periods for which an appeal has been lodged, the amount of group relief claimed by the appellant companies and the amount of corporation tax that the appellant companies will have overpaid if the appeals succeed (which HMRC will have to repay) is outlined below.  If the appellant companies’ appeals succeed, in some accounting periods the group relief claimed will also displace advance corporation tax (“ACT”), originally set-off against mainstream corporation tax.  The amounts of unutilised ACT that would be generated in these instances are also listed below.
The amounts of group relief claimed/trading losses surrendered, the ACT displaced and the consequent repayments due to the appellant companies remain subject to final agreement between the parties and may ultimately be amended in light of discussions between the parties about issues which are unrelated to the present appeals.  The amounts listed in the table constitute the amounts currently claimed by the appellant companies.
Company/Accounting period	Group relief claimed (i.e. trading losses surrendered)	Repayment sought from HMRC	ACT displaced	
				
FCE Bank plc				
y/e 31/12/1994 (“FCE 1994”)	£538,521	£177,712	£0	
y/e 31/12/1995 (“FCE 1995”)	£85,276,864	£11,059,543	£17,081,822	
y/e 31/12/1996 (“FCE 1996”)	£51,947,128	£6,529,847	£10,612,705	
y/e 31/12/1997 (“FCE 1997”)	£79,785,525	£11,270,826	£13,854,807	
y/e 31/12/1998 (“FCE 1998”)	£118,391,093	£18,180,951	£18,520,288	
y/e 31/12/1999 (“FCE 1999”)	£74,608,319	£22,558,249	£0	
				
Ford Automotive Leasing Ltd				
y/e 30/09/1997 (“FALL 1997”)	£2,098,259	£611,373	£60,013	
y/e 30/09/1998 (“FALL 1998”)	£7,106,810	£2,203,111	£0	
				
Jaguar Cars Ltd				
y/e 31/12/1995 (“JCL 1995”)	£2,517,012	£833,819	£0	
				
Jaguar Cars Overseas Holdings Ltd				
y/e 31/12/1995 (“JCOHL 1995”)	£1,902,386	£620,567	£0	
				
Jaguar Cars Exports Ltd				
y/e 31/12/1995 (“JCEL 1995”)	£6,763,649	£2,232,004	£0	
y/e 31/12/1996 (“JCEL 1996”)	£1,053,880	£347,780	£0	

TOTAL REPAYMENT SOUGHT FROM HMRC (excluding interest)	£76,625,782		

B.	Lead case
The FCE 1994 appeal is the lead case in respect of all of the appeals listed in the table above.  It is agreed that all of these appeals will be determined by and bound by the result in the FCE 1994 appeal.  Accordingly, if the FCE 1994 appeal succeeds, all of the above appeals shall also succeed; and if the FCE 1994 appeal fails, all of the above appeals shall also fail. 
C.	Further notes
There was no group relationship between FMCL and FCE for the period 21 December – 30 December 1995.  The FCE 1995 appeal must therefore be dismissed in respect of this 10-day period, in any event.
JCEL and FMCL were members of a group under the express terms of the Group Relief Provisions (i.e. a group where all of the members were UK resident) from 19 December 1996 – 31 December 1996.  The JCEL 1996 appeal must therefore be allowed in respect of this 13-day period, in any event.
3.	We set out the approach to the interpretation of tax treaties that the Special Commissioners adopted in Smallwood v HMRC [2008] STC (SCD) 629:
The approach to interpreting a treaty 
“94.	In IRC v Commerzbank [1990] STC 285, 297-8, in a passage approved by the Court of Appeal in Memec v IRC [1998] STC 754, 766g, Mummery J summarised the approach to treaty interpretation laid down by the House of Lords in Fothergill v Monarch Airlines Ltd [1981] AC 251 in the following way: 
‘(1) It is necessary to look first for a clear meaning of the words used in the relevant article of the convention, bearing in mind that ‘consideration of the purpose of an enactment is always a legitimate part of the process of interpretation’: per Lord Wilberforce (at 272) and Lord Scarman (at 294).  A strictly literal approach to interpretation is not appropriate in construing legislation which gives effect to or incorporates an international treaty: per Lord Fraser (at 285) and Lord Scarman (at 290). A literal interpretation may be obviously inconsistent with the purposes of the particular article or of the treaty as a whole. If the provisions of a particular article are ambiguous, it may be possible to resolve that ambiguity by giving a purposive construction to the convention looking at it as a whole by reference to its language as set out in the relevant United Kingdom legislative instrument: per Lord Diplock (at 279)
 (2) The process of interpretation should take account of the fact that— 
‘The language of an international convention has not been chosen by an English parliamentary draftsman. It is neither couched in the conventional English legislative idiom nor designed to be construed exclusively by English judges. It is addressed to a much wider and more varied judicial audience than is an Act of Parliament which deals with purely domestic law. It should be interpreted, as Lord Wilberforce put it in James Buchanan & Co. Ltd v. Babco Forwarding & Shipping (UK) Limited, [1987] AC 141 at 152, “unconstrained by technical rules of English law, or by English legal precedent, but on broad principles of general acceptation’: per Lord Diplock (at 281–282) and Lord Scarman (at 293).”. 
(3) Among those principles is the general principle of international law, now embodied in article 31(1) of the Vienna Convention on the Law of Treaties, that ‘a treaty should be interpreted in good faith and in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose’.  A similar principle is expressed in slightly different terms in McNair’s The Law of Treaties (1961) p 365, where it is stated that the task of applying or construing or interpreting a treaty is ‘the duty of giving effect to the expressed intention of the parties, that is, their intention as expressed in the words used by them in the light of the surrounding circumstances’. It is also stated in that work (p 366) that references to the primary necessity of giving effect to ‘the plain terms’ of a treaty or construing words according to their ‘general and ordinary meaning’ or their ‘natural signification’ are to be a starting point or prima facie guide and ‘cannot be allowed to obstruct the essential quest in the application of treaties, namely the search for the real intention of the contracting parties in using the language employed by them’.
(4) If the adoption of this approach to the article leaves the meaning of the relevant provision unclear or ambiguous or leads to a result which is manifestly absurd or unreasonable recourse may be had to ‘supplementary means of interpretation’ including travaux préparatoires: per Lord Diplock (at 282) referring to article 32 of the Vienna Convention, which came into force after the conclusion of this double taxation convention, but codified an already existing principle of public international law. See also Lord Fraser (at 287) and Lord Scarman (at 294).
(5) Subsequent commentaries on a convention or treaty have persuasive value only, depending on the cogency of their reasoning.  Similarly, decisions of foreign courts on the interpretation of a convention or treaty text depend for their authority on the reputation and status of the court in question: per Lord Diplock (at 283–284) and per Lord Scarman (at 295).
(6) Aids to the interpretation of a treaty such as travaux préparatoires, international case law and the writings of jurists are not a substitute for study of the terms of the convention.  Their use is discretionary, not mandatory, depending, for example, on the relevance of such material and the weight to be attached to it: per Lord Scarman (at 294).’
95.	Article 31 of the Vienna Convention on the Law of Treaties referred to in this quotation provides as follows:
“1.  A treaty shall be interpreted in good faith in accordance with the ordinary meaning to be given to the terms of the treaty in their context and in the light of its object and purpose.
2.  The context for the purpose of the interpretation of a treaty shall comprise, in addition to the text, including its preamble and annexes:
(a) any agreement relating to the treaty which was made between all the parties in connection with the conclusion of the treaty;
(b) any instrument which was made by one or more parties in connection with the conclusion of the treaty and accepted by the other parties as an instrument related to the treaty. 
3. There shall be taken into account together with the context:
(a) any subsequent agreement between the parties regarding the interpretation of the treaty or the application of its provisions;
(b) any subsequent practice in the application of the treaty which establishes the agreement of the parties regarding its interpretation;
(c) any relevant rules of international law applicable in the relations between the parties.
4. A special meaning shall be given to a term if it is established that the parties so intended.
…
98. The Treaty is based on the OECD Model Tax Convention of 1977.  The OECD Model has a Commentary explaining the terms of the Model which is accordingly an important means of interpretation of the Model and treaties following the Model.  Although not the subject of argument in this appeal, we are aware that there is academic literature discussing how the Commentary fits into articles 31 and 32 of the Vienna Convention.  Our view is that the negotiators on both sides could be expected to have the Commentary in front of them and can be expected to have intended that the meaning in the Commentary should be applied in interpreting the Treaty when it contains the identical wording.  This is as much true of the United Kingdom which is a member of the OECD as it is of Mauritius, which is not.  The difference is that the United Kingdom had the opportunity of stating that it disagreed with any part of the Commentary by making an Observation, while Mauritius did not, although the Commentary does now contain Observations by a number of non-OECD member countries, but not including Mauritius. The main treaty interpretation issue here is over the meaning of “place of effective management” in article 4(3). If the Commentary contains a clear explanation of the meaning the term it seems clear that the parties to the Treaty intended that such explanation should be more important than the ordinary meaning to be given to the terms of that phrase. This is either on the basis that the existence of the Model and Commentaries demonstrate that the parties intended it as a special meaning within article 31(4) of the Vienna Convention, or that the Vienna Convention does not purport to be a comprehensive statement of the method of treaty interpretation.  Its own commentary states that “Accordingly the [International Law] Commission confined itself to trying to isolate and codify the comparatively few general principles which appear to constitute general rules for the interpretation of treaties” (Introduction paragraph (5)).  The Commentary has been referred to in a number of decisions by the United Kingdom courts.
99.	The relevance of Commentaries adopted later than the Treaty is more problematic because the parties cannot have intended the new Commentary to apply at the time of making the Treaty.  However, to ignore them means that one would be shutting one’s eyes to advances in international tax thinking, such as how to apply the treaty to payments for software that had not been considered when the Treaty was made.  The safer option is to read the later Commentary and then decide in the light of its content what weight should be given to it.” 
4.	 The relevant legislation is to be found in TA 1988 and is as follows:
“402 Surrender of relief between members of groups and consortia
(1) Subject to and in accordance with this Chapter and section 492(8), relief for trading losses and other amounts eligible for relief from corporation tax may, in the cases set out in subsections (2) and (3) below, be surrendered by a company (“the surrendering company”) and, on the making of a claim by another company (“the claimant company”) may be allowed to the claimant company by way of a relief from corporation tax called “group relief”.
(2) Group relief shall be available in a case where the surrendering company and the claimant company are both members of the same group.
413 Interpretation of Chapter IV
(1) The following provisions of this section have effect for the interpretation of this Chapter.
(3) For the purposes of this Chapter—
 (a) two companies shall be deemed to be members of a group of companies if one is the 75 per cent subsidiary of the other or both are 75 per cent subsidiaries of a third company;
 (b) “holding company” means a company the business of which consists wholly or mainly in the holding of shares or securities of companies which are its 90 per cent subsidiaries and which are trading companies; and
 (c) “trading company” means a company the business of which consists wholly or mainly in the carrying on of a trade or trades.
(5) References in this Chapter to a company apply only to bodies corporate resident in the United Kingdom; and in determining for the purposes of this Chapter whether one company is a 75 per cent subsidiary of another, the other company shall be treated as not being the owner—
 (a) of any share capital which it owns directly in a body corporate if a profit on a sale of the shares would be treated as a trading receipt of its trade; or
 (b) of any share capital which it owns indirectly, and which is owned directly by a body corporate for which a profit on a sale of the shares would be a trading receipt; or
 (c) of any share capital which it owns directly or indirectly in a body corporate not resident in the United Kingdom.”
5.	Article 24 (headed Non-discrimination) of the Treaty contains the following provision, which is identical to art 24(5) of the OECD Model Tax Convention on Income and Capital (“the OECD Model”):
“(5) Enterprises of a Contracting State [here the UK], the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more residents of the other Contracting State [the US], shall not be subjected in the first-mentioned Contracting State [the UK] to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State [the UK] are or may be subjected.”
6.	Mr Gardiner QC, for the Appellant contends in outline:
(1)	The starting point for the enquiry as to whether Article 24(5) of the Treaty applies is the situation of the UK company concerned (here, the Appellant) which is the object of art 24(5): what is the treatment of the Appellant for tax purposes in the UK, and is that treatment less favourable or different from the treatment which would be accorded to it were it held by a UK, rather than a US, company?
(2)	The answer to that question is that FCE pays UK corporation tax which it would not do if it could claim group relief for the losses of FMCL.  The only reason it cannot do so is because its share capital is held by a US, rather than a UK, company, and section 413(5) TA 1988 requires, as a condition of a group relief claim, that FCE and FMCL should be held by a UK resident parent company.
(3)	The decision of the House of Lords in Boake Allen Limited v HMRC [2007] 1 WLR 1386 on which HMRC relies (which held that the UK group income rules did not infringe a treaty provision in identical terms to art 24(5)) can be distinguished from the Appellant's case.  In Boake Allen Lord Hoffman emphasises that the different treatment must be on the sole ground of (here) US ownership.  This involves a two stage process: first, is there difference in treatment, and secondly, is the ground foreign ownership (and nothing else)?  Lord Hoffmann was concentrating on the second of these by considering whether a group income election was available in other situations.  There the tax treatment of the parent was material because the legislation required a joint election by the parent and subsidiary.
(4)	Here the position is different.  The tax treatment of the parent is irrelevant to group relief between FCE and FMCL.  The only relevant consideration is the residence of the owner of the two subsidiaries.  This is demonstrated by the fact that when the law was changed in 2000 the only change was to remove the UK residence requirement.
(5)	Art 24(5) is concerned with a situation where the capital of the UK enterprise is held directly by the US enterprise, and not just a situation where ultimate ownership or control is vested in the US enterprise – if, as in the present case, the facts are simply that a US company holds shares in a UK subsidiary, the question of whether there is discrimination in terms of art 24(5) is tested by reference to that situation.
7.	Mr Glick QC, for HMRC contends in outline:
(1)	The object and purpose of art 24(5) is to ensure that the UK does not impose different tax rates on UK resident companies ultimately owned or controlled by US residents in comparison with those imposed on UK resident companies ultimately owned or controlled by UK residents on the ground that the owner or controller is resident in the US.    It is clear from [17] of Lord Hoffmann’s speech in Boake Allen (and, in particular, the situations he describes by way of example) that art 24(5) is not concerned with the immediate parent of the UK company in question.  It is concerned with the place in which control of the UK company actually rests.
(2)	The group relief provisions require that all companies in the group are potentially liable to UK corporation tax and potentially capable of benefitting from loss relief.
(3)	If the common shareholder were an individual (wherever resident), or a corporation resident outside the UK, losses would not be transferable by way of group relief.
(4)	It follows that the group relief provisions did not treat companies owned by US shareholders differently on the ground that they were so owned or controlled.  If FMC had been wholly owned and controlled by UK resident- individuals, group relief would still have been denied to the Appellant despite the fact that control of the Appellant would then have rested (ultimately) in the UK and not in the US.  Equally, if FMC had owned a UK holding company which in turn owned both the Appellant and FMCL, group relief would have been available to the Appellant despite the fact that control rested with a US resident (FMC).  This is precisely the point which Lord Hoffmann was making in [17] of his speech.
(5)	The Appellant and FMCL were treated differently from two subsidiaries of a UK resident company on the ground that they did not have a common corporate shareholder resident in the UK, not on the ground that ultimate ownership and control lay in the US.  If an intermediate UK holding company had been interposed, the fact that the entire group was owned and controlled from the US would not have prevented losses being transferable between the Appellant and FMCL by way of group relief: that in itself demonstrates that ultimate US control and ownership is not the ground of discrimination.
(6)	Lord Hoffmann was not saying that s 247 TA 1988 (the group income provision the subject of the dispute in the Boake Allen case) was a case of discrimination within the meaning of art 24(5) that was somehow justified.  He was saying that where two subsidiaries are treated differently, but not because one is ultimately owned outside the UK and the other is not, that is not discrimination within the article at all because the ground of the different treatment is not the factor of foreign ownership or control.  That is the principle of the Boake Allen decision which has then to be applied to the facts of the Appellant’s case.  In the present case, there would have been a breach of art 24(5) if, however the group organised its affairs, loss relief were not transferable between members because ultimate ownership and control rested in the US.  But that was not the case.  Loss relief was not transferable because the Appellant and FMCL did not have a common corporate shareholder resident in the UK.
(7)	The OECD Commentary (dating from 2008) supports this interpretation.
8.	Lord Hoffmann approached the issue relating to an identical treaty provision in the following way in the House of Lords in Boake Allen Limited v HMRC [2007] 1 WLR 1386, reported as NEC Semi-Conductors Ltd v IRC [2007] STC 1265:
“16.  The question, as it seems to me, is whether section 247 discriminates against a UK company on the ground that its capital is ‘wholly or partly owned or controlled, directly or indirectly’ by residents of the US, or Japan, or some other foreign state. In relation to article 24(1) of the OECD model convention, which prohibits discrimination between residents on grounds of nationality, the commentary says that the ‘underlying question’ is whether two residents are being treated differently ‘solely by reason of having a different nationality.’ It does not repeat this observation in relation to article 24(5), but the principle must be the same….
9.	It is common ground that the comparison is between a UK enterprise the capital of which is wholly or partly owned or controlled, directly or indirectly, by one or more US residents, and “other…enterprises” of the UK, meaning (or at least including) a UK enterprise the capital of which is owned by UK residents.   We have to compare the actual situation of the particular UK subsidiary of a US holding company with the same subsidiary of a UK holding company.  It is also common ground that the approach in this case is twofold: 
(1)	Is there in the particular circumstances more burdensome taxation of the actual UK claimant subsidiary that accepts a surrender of group relief from the other subsidiary, than there would have been if the parent company had been UK resident?  It is common ground that there is; group relief would be available to reduce the claimant subsidiary’s tax liability in the latter case but not the former.
(2)	Is that difference in taxation solely on the ground that its capital is “wholly or partly owned or controlled, directly or indirectly” (“owned” for short, and similarly for ownership and similar expressions) by the US parent company?  This is the real issue in this appeal.  
10.	It is clear in dealing with the second question that there can be circumstances in which there is more burdensome taxation in the UK and ownership by US (as opposed to UK) residents without the US ownership being the ground of the difference in treatment.  Suppose instead of the present claim the Appellant was claiming to be able to accept a surrender of losses from its US parent company.  It might be said that there was factually more burdensome taxation of the Appellant than would have occurred if the parent company had been UK (as opposed to US) resident (since in that situation the Appellant would have been entitled to group relief for the UK parent’s losses).  But the ground for the difference would not be US ownership.  Group relief would also have been denied if the US surrendering company had been a subsidiary, or a sister company, of the claimant company (with a common UK resident parent).  In other words although there happens in this example to be US ownership, the real ground for the denial of relief is that the surrendering company is US resident whether or not it is the owner.  This example shows that with group relief one can easily separate ownership from some other factor.
11.	 The issue in Boake Allen related to the payment of a dividend by a UK subsidiary to its US parent.  If the parent had been UK resident both parent and subsidiary would have been entitled to make the joint election that the subsidiary did not pay ACT on the dividend with the result that if the parent paid-on the same amount by way of dividend to its shareholders the parent would pay an equivalent amount of ACT.  If no election is made the subsidiary pays the ACT on its dividend which franks the onward dividend by the parent which does not pay any ACT.  In other words, the difference in treatment is the cash flow advantage of being able to elect jointly to defer payment of ACT, and it was the cash flow disadvantage of not being entitled to make a group income election where the parent was a European company that was held to be contrary to European law in Metallgesellschaft Ltd v Inland Revenue Comrs (Joined Cases C-397 and 410/98).
12.	Boake Allen is a more difficult case to analyse than our group relief example in that a dividend must necessarily be paid to the direct parent company and so one cannot ask what would be the position if the dividend had not been paid to the parent, in the same way as we asked in our example in paragraph 10 above whether the fact that the surrendering company was the parent was the ground of the difference in treatment.  It might therefore be argued that the ground for any difference in treatment (leaving aside any difference specifically provided for by the Treaty) must necessarily be the foreign ownership.  This is effectively how Park J and the Court of Appeal approached the case.  Park J at [2004] STC 489 at [26] posed three questions: what was meant by “other similar enterprises,” was the inability to make a group income election “taxation or any requirement connected therewith,” and was the taxation “other or more burdensome”?  The Court of Appeal at [2006] STC 606 did the same.  Lord Hoffmann summarised their approach in this way:
“14.  The reasoning of the judge and the Court of Appeal was that article 24(5) of the US DTC (for example) requires one to compare the positions of the UK-resident subsidiary of a US parent and the UK-resident subsidiary of a UK parent. If the latter can elect under section 247 and the former cannot, that is discrimination contrary to article 24(5).”
13.	In the House of Lords Lord Hoffmann, with whom the others concurred on this aspect, analysed it in this way, continuing the quotation from the passage already quoted in paragraph 8 above:
“16…Does section 247 discriminate on the grounds that the capital of the subsidiary is controlled [he must here be using “controlled” as shorthand for ‘wholly or partly owned or controlled, directly or indirectly’ that he had quoted earlier in the same paragraph] by a non-resident company?
17.  In my opinion it plainly does not. For example, if a US parent were to interpose a UK resident holding company between itself and its UK-resident subsidiary, the control would remain in the US but there would be no objection to an election by the UK subsidiary and its immediate, UK-resident parent. On the other hand, an individual US shareholder and the company he controls in the UK could not elect, but the reason is not because the company is subject to US control. An individual UK shareholder and his company could not elect either, for the same reason that a non-resident company cannot elect. It is because an individual is not liable to corporation tax. An election is a joint decision by two entities paying and receiving dividends that one rather than the other will be liable for ACT. This is not a concept which can meaningfully be applied when one of the entities is not liable for ACT at all.
18.  Unfortunately the judge and the Court of Appeal did not have the benefit of the discussion of the nature of the section 247 election in the speeches in this House in Pirelli Cable Holding NV v Inland Revenue Comrs [2006] 1 WLR 400. The point was luminously made by Lord Nicholls of Birkenhead, at para 19, in a speech with which the rest of their Lordships agreed:
‘A group income election is a group election. A group income election cannot be made by a subsidiary alone. It is an election made jointly by the subsidiary paying the dividend and the parent receiving the dividend. By making such an election both companies seek the fiscal consequences of making the election. One consequence is that by making the election the subsidiary will obtain the advantage of not paying ACT in respect of the relevant dividend. Another consequence is that the subsidiary will obtain this advantage at the cost of depriving the parent of a tax credit in respect of the dividend. These two fiscal consequences are inextricably linked. You cannot have one without the other. That is why the election has to be made jointly. The advantage to the paying subsidiary comes at a price to the recipient parent.’
19.  In my respectful opinion, it is not possible to decouple the positions of parent and subsidiary as the judge and the Court of Appeal sought to do. To allow an election by a group with a US-resident parent would not be to give a relief available to a group with a UK-resident parent. It would be something different in kind. It would not be an election as to who would be liable for ACT but as to whether the group should pay it at all.”
14.	We summarise our understanding of Lord Hoffmann’s approach as follows:
(1)	The alleged discrimination was the inability of the taxpayer (the UK subsidiary) to make a group income election under s 247 TA 1988:
“(1) Where a company (‘the receiving company’) receives dividends from another company (‘the paying company’), both being bodies resident in the United Kingdom, and the paying company is—(a) a 51 per cent subsidiary of the other…then…the receiving company and the paying company may jointly elect that this subsection shall apply to the dividends received from the paying company by the receiving company (‘the election dividends’)
(2) So long as the election under subsection (1) above is in force the election dividends shall be excluded from sections 14(1) and 231…..”
(2)	If the parent had been UK resident the two companies could have made a group income election.
(3)	The reason why the two companies could not make a group income election was because the recipient of the dividend was not liable to pay ACT, as shown by the tabulation of Lord Hoffmann’s examples, not because the recipient was a US resident rather than a UK resident.
Type of ownership	Residence of recipient of dividend	Group income election possible	Whether recipient liable to pay ACT on payment of a dividend	
Direct, company (the situation in the case)	US	No	No	
Direct, company	UK	Yes	Yes	
Indirect, non-resident company (as to the dividend between the UK sub-subsidiary and subsidiary)	UK	Yes	Yes	
Direct, individual	UK	No	No	
Direct, individual	US	No	No	
15.	The table shows the exact concurrence between liability to pay ACT and the ability to make a group income election, which is different from the residence of the recipient.  Therefore it clearly shows that the ground for the difference in treatment was the recipient’s liability to pay ACT.  Therefore the alleged discrimination was not prevented by the Treaty provision.  
16.	We believe that there is a further situation, which is particularly relevant as it concerns a corporate shareholder, that supports the argument, where the owner of the shares is an incorporated charity resident in the UK:
Direct, incorporated charity	UK	No	No	
Section 247(5) provided that an election may not be made where the receiving company is entitled by virtue of an exemption to claim the tax credit on the dividend.
17.	The significance of the examples is therefore to show that the real ground of the difference in treatment was the liability of the recipient to pay ACT, and the residence of the owner in the situation under appeal was not the real ground.  The examples of the individual owner (and also the charity) demonstrate that the liability to pay ACT is not equivalent to the residence of the owner, although it would be if only company recipients were considered (as was pointed out by Brian Cleave in “Boake Allen Limited and others v HMRC—group income elections and non-discrimination” [2007] BTR 604 at 606).  Having decided that the real ground for the difference in treatment was not the residence of the owner that is the end of the matter.  There was no need to go back to the facts of the case.
18.	Accordingly, we apply the same approach to the facts of this appeal:
(1)	The alleged discrimination is the inability of the Appellant (one of the UK subsidiaries) to make a group relief claim in respect of the losses of the other UK subsidiary because the holding company was US resident.  It is relevant that, unlike the situation in Boake Allen, as was emphasised by Lord Hoffmann at [19], the group relief claim and surrender are made by the two subsidiaries.  The parent company is not involved.
(2)	If the holding company had been UK resident the Appellant could have made a group relief claim.
(3)	The question is whether the inability of the Appellant to make a group relief claim is the US residence of the holding company or something else.  We repeat the same examples in the table:
Type of ownership	Residence of holding company	Group relief claim possible	
Direct, company (the situation in this appeal)	US	No	
Direct, company	UK	Yes	
Indirect, non-resident company (as to group relief between the subsidiaries of the UK intermediate holding company)	UK (the intermediate holding company)	Yes	
Direct, individual	UK	No	
Direct, individual	US	No	
Direct, incorporated charity	UK	Yes	
19.	The important point is that there is no possible equivalent right hand column which unifies all the examples as there was in Boake Allen.  What is the consequence?  Mr Glick contends that this demonstrates that ownership cannot be the ground for the difference in treatment.  Mr Gardiner contends that it demonstrates that ownership must be the ground.  We agree with Mr Gardiner.  The purpose of Lord Hoffmann’s examples was to show that there was a ground other than ownership for the difference in treatment, and here there is not.  The examples serve a positive purpose of analysing whether there is a different ground from the apparent one of residence; they cannot be used for a negative purpose of showing that on the facts of the particular case the difference in treatment is not on the ground of residence.  On the facts of this appeal the difference in treatment is because the direct holding company is US rather than UK resident.  No other ground for the difference in treatment can be shown.  That is therefore discrimination prevented by the plain wording of the Treaty provision.  
20.	The fact that there are other examples where the difference in treatment does not depend on the residence of the owner is irrelevant to whether there is discrimination in this case.  In particular, since the Treaty provision prevents discrimination on the ground of either direct or indirect US ownership, it is sufficient that there is discrimination on the ground of direct, though not indirect, ownership.  Mr Glick’s examples over-concentrate on indirect ownership, arguing that if the ultimate owners of FMC were UK residents, relief would still not be available, and if there were an intermediate UK holding company it would be.  This merely demonstrates that ultimate ownership is not the criterion for refusing group relief in the present case.  The correct comparison with indirect ownership is that the group relief treatment of the two subsidiaries of the UK intermediate holding company is the same whatever the residence of the ultimate holding company, which means that there is no discrimination on the ground of indirect ownership.  Similarly, the fact that an individual cannot be the holding “company” of a group for this purpose, whatever his residence, is irrelevant to whether there is discrimination on the ground of ownership when there is a holding company; it merely shows that there is no discrimination where the owner is an individual.
21.	We are fortified in reaching the conclusion that the Treaty prohibits the denial of group relief where there is a US (as opposed to a UK) holding company and rely on the fact that courts at the highest level in at least three other countries have reached the same conclusion on identical (or near so) treaty provisions in relation to similar reliefs in their respective jurisdictions.  We regard it as important that courts give consistent interpretations of treaty provisions contained in the OECD Model that are widely used in tax treaties.
Dutch Supreme Court, 23 December 1992, BNB 1993/71c 
22.	This the same case that was referred to the ECJ as Halliburton, Case 1/93 [1994] STC 655 and it is convenient to quote the ECJ Advocate General’s summary of the Dutch law concerned:
“3. The acquisition was part of a transaction in which Halliburton Co Germany GmbH transferred its undertaking, in so far as it was operated by its facilities in the Netherlands, to Halliburton Services BV. The purpose was a reorganisation of the international Halliburton Group whereby the Dutch part of the German company was to be transferred to a Netherlands company. Within the group, Halliburton Inc, incorporated in the USA, holds all the shares in the transferor, Halliburton Co Germany GmbH. Indirectly, namely via its wholly-owned subsidiary Halliburton Oilfield Services BV, it also holds all the shares in the transferee, Halliburton Services BV.
4. In view of those circumstances, Halliburton Services BV takes the view that the acquisition of the immovable property in question should be exempt from land transfer tax.
5. In that respect art 15 of the Netherlands Wet op Belastingen van Rechtsverkeer (law on the taxation of legal transactions) provides that the acquisition of immovable property ‘on the internal reorganisation of public limited companies and private limited companies’ is exempt from land transfer tax. Detailed conditions for exemption are contained in the Uitvoeringsbesluit Belastingen van Rechtsverkeer (implementing regulation on the taxation of transactions). Article 5(1) of that regulation provides that the acquisition must take place between companies in the same 'group'. According to art 5:
‘(3) “Group” means a company, the shares in which are not entirely or almost entirely, directly or indirectly, held by another company, together with any other companies in which it holds directly or indirectly all or nearly all of the shares.
(4) “Companies” means public companies limited by shares and private companies limited by shares.’ 
6. The plaintiff takes the view that the restriction of the exemption to public limited companies and private limited companies (incorporated under Netherlands law) is illegal.
7. In relation to that argument, the Hoge Raad first considered the significance of the legal form of the parent company for the purposes of the tax exemption sought by the plaintiff. It found that it would be contrary to the Double Taxation Agreement between the Netherlands and the USA if no exemption were granted on the ground that the parent company is neither a public nor a private limited company.”
The Judgment also mentions: 
“6. Under art 5 of the implementing order, the said exemption is confined to transfers between public limited companies and private limited companies belonging to a group in which the parent company is also constituted in either of those two legal forms. It is clear from the documents before the court, however, that the Hoge Raad has already decided that, under the principle of non-discrimination as laid down in the bilateral treaty concerning taxation between the Netherlands and the United States of America, Halliburton Services BV may not be deprived of the benefit of exemption on the ground that the parent company of the Halliburton Group, Halliburton Inc, is constituted under United States law.”
The situation was therefore that tax-free transfers could be made between Dutch NVs and BVs in a group where the parent was a BV or an NV.  The parent was a US company and the Hoge Raad (Supreme Court) decided that the equivalent treaty provision applied to allow the relief between two Dutch companies in principle where the parent was a US resident.  The effect of the ECJ decision was that the transfer by a German subsidiary of its Dutch branch to a Dutch subsidiary was entitled to the same relief as if the transferor had been a Dutch company.  We were provided with translations of the following.  The notice of appeal to the Supreme Court included:
“2.5.2.  Conflict with the non-discrimination clause of the American tax treaty.
The Court [of Appeal of The Hague] loses sight of the fact that limitation of the exemption to companies of which the shareholder is an NV or BV established in accordance with Dutch law is in conflict with art.XXV paragraph 4 of the tax treaty.  After all, the requirement that the top company of the group is established according to Dutch law results in a severe burden of taxation for a Dutch company, the shareholder of which is an American company, than would be the case for a Dutch company, the shareholder of which is another Dutch company.”
The Advocate General (of the Dutch Supreme Court) said:
“5.2.3.  According to the clarification given for section V of the ground for cassation [the passage quoted above is from section V] the requirement that the top company of the group is founded in accordance with Dutch law results in a heavier burden of tax for a Dutch company of which the shareholder is an American company than would be the case for a Dutch company of which the shareholder is an American company than would be the case for a Dutch company of which the shareholder is another Dutch company.
5.2.4.  If the German GmbH must be placed on the same footing as a Dutch NV or BV on the ground of the EEC Treaty, the non-application of the exemption of art 15, first paragraph, letter h, WBR must rest exclusively upon the fact that the parent company is an American Inc.  The affected party is consequently subject to a tax that would not be levied if the parent company was a Dutch NV or BV, which is what art.XXV, fourth paragraph of the USA Treaty prohibits. 
5.2.6.  For the sake of completeness I observe further that art.XXV, fourth paragraph, USA Treaty according to the literal text is not applicable to the affected party, given that its shares are held by a Dutch interim holding company.  I assume however that a reasonable interpretation of art.XXV, fourth paragraph entails that no notice is taken of this interim holding company.”
The Dutch Supreme Court’s decision contains the following:
“3.5 Part V opposes itself to the opinion of the Court [of Appeal of the Hague] that for the non-applicability of the exemption regulation it is important that the legal form of the affected party’s parent company – A Inc., is not that of a public limited company or a private limited company, that also that that distinction in itself had nothing go do with nationality.
3.6 Article 5, paragraph 3, in conjunction with paragraph 4 of the Implementation Decree, does indeed limit the exemption to acquisitions in the context of internal reorganisations within groups, the parent companies of which groups are a public limited company or a private limited company.  Rightly however, part V assumes that this restriction in this particular case – ie based on the assumption stated 3.4 [that the legal form of the seller – G GmbH—constitutes no obstacle to the exemption] – is irreconcilable with the provisions contained in article XXV, fourth paragraph, of the treaty between the Kingdom of the Netherlands and the United States of America in relation to the taxation of income and certain other taxes (Trb. 1995, 124).  The consequence of the limitation is that the affected party in the Netherlands is subject to heavier taxation than would have been the case if its parent company had been a public limited company or a private limited company—which is precisely what is prohibited by the treaty provision in question.  In view of the intention of that provision, the circumstance that A. Inc. was only the holder of all the shares in the affected party indirectly brings about no change in this opinion.  Part V is accordingly to that extent proposed correctly.”
The circumstances seem similar to ours in that the legal provision required all companies in the group, including specifically the parent, to be NVs or BVs.  It is interesting that the Advocate General at paragraph 5.2.4 concludes that the non-application of the exemption rests exclusively upon the fact that the parent company is American, which demonstrates that he was looking for the sole ground.
Finnish Supreme Administrative Court, Decision KHO 10.05.2000/864
23.	The context is that a Finish company within a group may make a group contribution up to the amount of its profits to another Finnish company that is deductible from the profits of the first and is taxable income of the second company (ie something on the lines of subvention payments that existed in the UK before 1965 (s 20 Finance Act 1953)).  The following is a translation of part of the Court’s decision, which is an appeal against refusal of an advance ruling:
“A Oy [a Finnish company] intends to demerge in the tax year 2000 and form the new companies A Oy and B Oy.  In the demerger the Danish company C A/S will become the parent company of each of the two new companies.
A Oy, will be established in connection with the demerger, might make group contributions to B Oy in he tax years 2000 and 201.  Both companies are Finnish limited liability companies pursuing business operations; both companies’ accounting periods end on 31 December.  The conditions for the deductibility of the group contribution are thus met in this respect.
…
A Oy and B Oy are companies that are registered in Finland.  Their capital is owned by the Danish company, C A/S.  Because this company is not Finnish, it is not a corporate body as referred to in section 3 of the Act on Group Contributions in taxation.  Under Clause 4 (anti-discrimination) of Article 27 of the Nordic Tax Treaty, a company in a contracting state, whose capital is owned by a person living in a different contracting state, must not be subjected to taxation of a different kind or taxation that is more onerous that that imposed or possibly imposed on some other company of a similar type in Finland.  Consequently, the assistance provided by A Oy to B Oy, referred to in the application, must for the purposes of taxation be processed as a group contribution, notwithstanding the fact that the companies are owned by a company that is not Finnish.  It follows that the conditions for the deductibility of the group contribution are met in respect of ownership, as well.”
Again the circumstances seem similar to ours, requiring all companies in the group to be Finnish, with the same treaty provision (set out in the last paragraph of the quotation) being held to have the effect that group contributions between two Finnish companies owned by a Danish company is permitted.  No reasoning is given.
Swedish Supreme Administrative Court, RÅ 1996 ref. 69 and 1998 ref. 49
24.	 This also concerns group contributions between two Swedish companies owned by a German parent in case ref 69 and a Cyprus offshore company in case ref 49.  They are appeals against refusal of an advance ruling.  The following is a translation of part of the Court’s decision
1996 ref. 69
“Grounds.  X AB is owned by Y AB.  Y AB and Z AB are owned by the German company A.  X AB cannot, upon a direct application of §2, 3rd sub-section of the Act (1947:576) regarding State Income tax, SL, have a deductible right for a group contribution to Z AB since X AB and Z AB form part of a group of companies led by a German business.  X Ab asks whether a deduction for a group  contribution can be allowed for the 1995 taxation on the strength of the double taxation agreement with the German Federal Republic (SFS 1960:549).  [The treaty provision is then set out.  The translation by the International Bureau of Fiscal Documentation is: “4. Enterprises of one State, the capital of which is wholly or partly owned or controlled, directly or indirectly by one or more residents of the other State, shall not be subjected in the first-mentioned State to any taxation or any requirement connected therewith which is other or more burdensome than the taxation and connected requirements to which other similar enterprises of that first-mentioned State are or may be subjected.”]
The fundamental question in the matter is whether—in the sense intended in the discrimination rule – (Swedish) joint stock limited companies which only have other such companies as a parent company, can be regarded as other similar [enterprises]’ in relation to a joint-stick limited company which is owned or controlled by a Kommanditgesellschaft auf Aktier (KGaA).
Reasons for the Supreme Administrative Court’s decision…Against this background, and with regard to what is otherwise informed regarding a KGaA’s and its shareholders’ civil law position, the Supreme Administrative Court finds that a KGaA, despite the personal liability of one or more partners, should be equated with a joint-stock company in the relevant respect.  This means, in turn, that a Swedish joint-stock limited company which is owned by another joint-stock company, shall be regarded as a ‘similar [enterprise]’ in relation to a Swedish joint-stock limited company owned by a KGaA.  The latter joint-stock limited company shall, therefore, on the basis of article 22 §4 in the applicable double taxation agreement in the case, be accorded the same opportunities as the former regarding deduction for group contributions.”
It will be seen that the focus of the decision was whether a German KGaA with one or more partners with unlimited liability, of which there was no Swedish equivalent was similar to a Swedish limited joint stock limited company.  Once the Court had decided that it was, it applied the treaty provision, without any discussion, to give the same ability for the two Swedish subsidiaries to make a group contribution between themselves as if the parent company had been Swedish.
1998 ref. 49
“Interpretation of double taxation agreements shall be directed at ascertaining the agreement parties’ joint intentions (RÅ 1996 ref. 84).  What is stated in connection with the legislation concerning the double taxation agreement and the same years that the rules were introduced concerning foreign associations, militate in favour of the special relaxations for Cypriot offshore businesses snot then being regarded as (having to cause) causing these to be treated differently from other Cypriot companies upon the application of the double taxation agreement.  This gains further support from the 1993 legislation [requiring that a foreign company was required to be in a listed country, the list including Cyprus.  The changes that were made in 1995 [removing Cyprus from the list] and that do not appear to have been caused by any changes in the Cypriot tax conditions, cannot lead to an altered interpretation of the agreement.
The Supreme administrative Court finds, on these grounds, that the special taxation rules that apply to the Cypriot offshore companies do not prevent them being equated with Swedish joint-stock limited companies upon an application of the discrimination ban in the agreement.”
The Court’s focus is on the fact that the Cypriot company was an offshore company liable to a low rate of tax and not taxable on dividends from companies outside Cyprus.  Having found that such a company was sufficiently similar to a Swedish joint-stock limited company, the Court applied the treaty provision (the original language of which is English and is the same as the OECD Model) without any discussion.
25.	We can conclude that in all four cases a Supreme Court (and the reputation and status of the Court is relevant, see paragraph 94(5) of the quotation from Commerzbank set out in paragraph 3 above) has applied a similar treaty provision to treat a group with a treaty-partner parent company in the same way as respects the operation of domestic provisions applying between two domestic subsidiaries (with the aid of EU law in the Dutch example) as if there had been a domestic parent company.  Unfortunately apart from the Advocate General in the Dutch case the reasoning is not given and we do not know whether the reason is because such courts do not customarily set out their reasons or because the court considered that the application of the treaty provision was obvious.  
Finnish Supreme Administrative Court, Decision KHO: 1992-B-509 and 1992-B-510
26.	Two further Finnish cases were cited to us dealing with slightly different facts, a chain of companies with one or more treaty-partner resident companies in the chain in between the bottom domestic company making a group contribution to its ultimate domestic parent company.  In the first case there was a Dutch company between B Oy the parent and A Oy the sub-subsidiary making the group contribution to B Oy.  In the second there were two Swedish companies between B Oy and A Oy which occupied the same positions in the chain.  The majority in the Finnish Supreme Administrative Court said in translation in the first case:
“The corporations of the appeal registered in the Netherlands cannot be considered as subsidiary corporations in the meaning of section 3 of the Act on Group Contributions in Taxation, which was also the opinion of the Central Tax Board.  Other requirements of the above act for treating the contribution given by A Oy as a group contribution in taxation exist under the conditions described in the application.  A Oy is a company registered in Finland whose capital is directly and wholly owned by a company registered in the Netherlands.  Therefore, in accordance with article 26, paragraph 4 of the agreement between Finland and the Netherlands for avoidance of double taxation and tax avoidance, relating to prohibition of discrimination, A Oy should not be subjected to any other taxes or higher taxes or tax related charges other than those set out for a corresponding company whose capital is directly owned by a Finnish parent company or by its subsidiary registered in Finland.  Thus the contribution given by A Oy to B Oy at the end of accounting period on 31/12/1990 is tax deductible as a group contribution from the income of A Oy.  Consequently, the Supreme Administrative Court reverses the decision by the Central tax Board and the advance ruling, and states as a new ruling that A Oy is allowed to deduct the group contribution of the application which it has paid to B Oy at the end of the accounting period on 31/12/1990 in accordance tithe the Act on Group Contributions in Taxation.”
Two judges in the minority said:
“…The Dutch intermediary companies of the application whose ownership relationships could raise the ownership of A Oy by B Oy to nine tenths required by section 3 of the Act on Group Contributions in Taxation, are not in this context set any Finnish taxes in the meaning of the taxation agreement.  The fact, that A Oy, due to the ownership of the recipient of the group contribution B Oy not rising above the nine tenths required by the said act with the ownership shares of the Dutch intermediary companies, cannot utilize the deduction benefit of the said act, does not, taking into consideration that B Oy itself owns the mentioned intermediary companies registered in the Netherlands and we therefore are dealing with a Finnish group, constitute discrimination of the Finnish company owned by a company registered in another state ie in the Netherlands in the meaning of article 26, paragraph 4 of the taxation agreement.  As there is no impediment in the provisions of the agreement between Finland and the Netherlands for avoidance of double taxation and tax avoidance for not applying the provisions of group contributions under the conditions in question, I consider that there is no cause to alter the end result of the appeal against the decision by the Central Tax Board.”
The judgments in the second case are identical with the substitution of references to Swedish companies for Dutch companies (the IBFD’s translation of the equivalent provision of the Nordic Convention is identical to the OECD Model).
27.	The majority without any discussion concluded that the treaty required one to treat the intermediate treaty-partner companies as domestic companies for deciding whether the two domestic companies could make a group contribution between them.  Unfortunately we do not find the translation of the reasoning of the minority easy to understand but it seems to be that the ground for the difference in treatment was not ownership.  This may be because the effect was to transfer profits from the sub-subsidiary to the ultimate parent without paying a dividend that would have passed through the intermediate non-resident company the state of residence of which would have been entitled to tax it, if only to withholding tax.  But we can say that the majority decision is to the same effect as the other cases.
28.	We rely on all the above cases as support for the decision we have reached on the wording of the Treaty provision and in particular on the reasoning of the Dutch Advocate General upheld by the Dutch Supreme Court, which accords with the approach in Boake Allen.  
29.	Mr Glick also relied on the following passages from the OECD Commentary, which, except for paragraph 76, were all added in the 2008 update:
3.The various provisions of Article 24 prevent differences in tax treatment that are solely based on certain specific grounds (e.g. nationality, in the case of paragraph 1). Thus, for these paragraphs to apply, other relevant aspects must be the same. The various provisions of Article 24 use different wording to achieve that result (e.g. "in the same circumstances" in paragraphs 1 and 2; "carrying on the same activities" in paragraph 3; "similar enterprises" in paragraph 5). Also, whilst the Article seeks to eliminate distinctions that are solely based on certain grounds, it is not intended to provide foreign nationals, non-residents, enterprises of other States or domestic enterprises owned or controlled by non-residents with a tax treatment that is better than that of nationals, residents or domestic enterprises owned or controlled by residents (see, for example, paragraph 34 below).
…
76.This paragraph forbids a Contracting State to give less favourable treatment to an enterprise, the capital of which is owned or controlled, wholly or partly, directly or indirectly, by one or more residents of the other Contracting State. This provision, and the discrimination which it puts an end to, relates to the taxation only of enterprises and not of the persons owning or controlling their capital. Its object therefore is to ensure equal treatment for taxpayers residing in the same State, and not to subject foreign capital, in the hands of the partners or shareholders, to identical treatment to that applied to domestic capital.
77.Since the paragraph relates only to the taxation of resident enterprises and not to that of the persons owning or controlling their capital, it follows that it cannot be interpreted to extend the benefits of rules that take account of the relationship between a resident enterprise and other resident enterprises (e.g. rules that allow consolidation, transfer of losses or tax-free transfer of property between companies under common ownership). For example, if the domestic tax law of one State allows a resident company to consolidate its income with that of a resident parent company, paragraph 5 cannot have the effect to force the State to allow such consolidation between a resident company and a non-resident parent company. This would require comparing the combined treatment of a resident enterprise and the non-resident that owns its capital with that of a resident enterprise of the same State and the resident that owns its capital, something that clearly goes beyond the taxation of the resident enterprise alone.
78.Also, because paragraph 5 is aimed at ensuring that all resident companies are treated equally regardless of who owns or control their capital and does not seek to ensure that distributions to residents and non-residents are treated in the same way (see paragraph 76 above), it follows that withholding tax obligations that are imposed on a resident company with respect to dividends paid to non-resident shareholders but not with respect to dividends paid to resident shareholders cannot be considered to violate paragraph 5. In that case, the different treatment is not dependent on the fact that the capital of the company is owned or controlled by non-residents but, rather, on the fact that dividends paid to non-residents are taxed differently. A similar example would be that of a State that levies a tax on resident companies that make distributions to their shareholders regardless of whether or not they are residents or non-residents, but which, in order to avoid a multiple application of that tax, would not apply it to distributions made to related resident companies that are themselves subject to the tax upon their own distributions. The fact that the latter exemption would not apply to distributions to non-resident companies should not be considered to violate paragraph 5. In that case, it is not because the capital of the resident company is owned or controlled by non-residents that it is treated differently; it is because it makes distributions to companies that, under the provisions of the treaty, cannot be subjected to the same tax when they re-distribute the dividends received from that resident company. In this example, all resident companies are treated the same way regardless of who owns or controls their capital and the different treatment is restricted to cases where distributions are made in circumstances where the distribution tax could be avoided.
79.Since the paragraph prevents the discrimination of a resident enterprise that is solely based on who owns or controls the capital of that enterprise, it would not prima facie be relevant with respect to rules that provide for a different treatment of an enterprise based on whether it pays interest to resident or non-resident creditors. The paragraph is not concerned with rules based on a debtor-creditor relationship as long as the different treatment resulting from the rules is not based on whether or not nonresidents own or control, wholly or partly, directly or indirectly, the capital of the enterprise. For example, if under a State's domestic thin capitalisation rules, a resident enterprise is not allowed to deduct interest paid to a non-resident associated enterprise, that rule would not be in violation of paragraph 5 even where it would be applied to payments of interest made to a creditor that would own or control the capital of the enterprise, provided that the treatment would be the same if the interest had been paid to a non-resident associated enterprise that did not itself own or control any of the capital of the payer. Clearly, however, such a domestic law rule could be in violation of paragraph 4 to the extent that different conditions would apply for the deduction of interest paid to residents and non-residents and it will therefore be important to determine, for purposes of that paragraph, whether the application of the rule is compatible with the provisions of paragraph 1 of Article 9 or paragraph 6 of Article 11 (see paragraph 74 above). This would also be important for purposes of paragraph 5 in the case of thin capitalisation rules that would apply only to enterprises of a Contracting State the capital of which is wholly or partly owned or controlled, directly or indirectly, by non-residents. Indeed, since the provisions of paragraph 1 of Article 9 or paragraph 6 of Article 11 form part of the context in which paragraph 5 must be read (as required by Article 31 of the Vienna Convention on the Law of Treaties), adjustments which are compatible with these provisions could not be considered to violate the provisions of paragraph 5.
30.	As mentioned in paragraph 3 above in paragraph 99 of the quotation we consider that caution should be used in relying on Commentaries added later than the Treaty because it cannot be said that the parties made the Treaty in reliance on them.  On the other hand they represent current view of all members states of the OECD unless an observation (a disagreement with the Commentary, see paragraph 30 of the Introduction to the OECD Model) is expressed which neither the United States nor the United Kingdom has done in respect of the matters in dispute, and surprisingly nor have the Netherlands, Finland and Sweden when they have supreme Court decisions to the contrary effect.  Paragraph 3 provides for what Lord Hoffmann said in the passage quoted in paragraph 8 above was implied.  We have difficulty in following some of the other arguments.  For example, paragraph 77 states (correctly) that the provision relates only to the taxation of the enterprise concerned and not of the persons owning its capital, but why does it follow “that it cannot be interpreted to extend the benefits of rules that take account of the relationship between a resident enterprise and other resident enterprises (e.g. rules that allow consolidation, transfer of losses or tax-free transfer of property between companies under common ownership)”?  Such items seem to us to relate solely to the enterprise under consideration and not to the taxation of the owner.  And why are withholding tax obligations referred to in paragraph 78 when they do relate to the taxation of the owner of the capital and not to the enterprise under consideration (except as a procedural matter)?  We believe that the focus of the discussion is that grouping of losses etc might not be claimed where one group company is resident and the other non-resident, as shown by the example in paragraph 77, which we do not consider is the effect of the provision in any event (see paragraph 10 above).  If, as appears to be the case, the Commentary is saying that the combined effect of the taxation of the parent and subsidiary cannot be taken into account then it is similar to Lord Hoffmann’s conclusion at [19].  The wholly different situation in this appeal of the grouping of profits and losses between domestic subsidiaries of a non-resident parent company in the same state is not expressly addressed in the Commentary, which suggests that this was not a concern and might be why countries with court decisions to the effect that the treaty provision allows grouping in this situation did not object to the Commentary.  There is nothing in the Commentary that causes us to change the view we have reached on the wording of the provision in the light of Boake Allen and supported by decisions in three other countries.
31.	Accordingly we allow the appeal except in relation to the 10-day period from 21 December to 30 December 1995 (see Schedule 1 to the Statement of Agreed Facts heading C Further Notes) for which it is dismissed.  As noted in the Statement of Agreed Facts, this appeal is, by the agreement of the parties, a lead case in respect of the further appeals listed in that Statement and accordingly our decision to allow the appeal is to have effect to allow those further appeals also.
32.	This document contains full findings of fact and reasons for the decision. Any party dissatisfied with this decision has a right to apply for permission to appeal against it pursuant to Rule 39 of the Tribunal Procedure (First-tier Tribunal) (Tax Chamber) Rules 2009.   The application must be received by this Tribunal not later than 56 days after this decision is sent to that party.  The parties are referred to “Guidance to accompany a Decision from the First-tier Tribunal (Tax Chamber)” which accompanies and forms part of this decision notice.

JOHN F AVERY JONES

EDWARD SADLER

TRIBUNAL JUDGES
RELEASE DATE: