Treaty advantage was not main purpose in £18mn WHT repayment

In Burlington Loan Management DAC v HMRC [2022] TC08572, the First Tier Tribunal (FTT) found that whilst the ability to reclaim UK Income Tax withheld at source on interest payments dictated the price of a debt claim, taking advantage of the Treaty exemption was not the main purpose of the acquisition. 

• Burlington Loan Management DAC (BLM) is a 'designated activity company' incorporated and tax resident in Ireland. It is a European fund investment corporate vehicle for a New York-based Asset Manager, holding $6.9 billion of assets as of 2017.
• Lehman Brothers International (Europe) (LBIE) was a UK unlimited company that belonged to the Lehman Brothers global group, which went into Administration in 2008.
• LBIE had a debt claim filed against it as part of the administration process. The principal of the debt was just over £142 million and the interest element was nearly £92 million. The principal amount of the debt claim held by the original creditor, SAAD Investments Company Ltd (SICL), was paid in 2016.
• SICL had been in administration since 2009 and so its Liquidators arranged for the debt claim for the interest to be sold in 2018. BLM acquired the claim, paying 92% of the value for the claim. SICL was resident in the Cayman Islands.
• Several months later, the interest debt claim was paid in full. The administrators for LBIE paid BLM 80% of the interest owed (approximately £72.5 million) and withheld the other 20%, as Income Tax Withheld At Source under s.874 Income Tax Act 2007. Just over £18 million was paid to HMRC as tax.
• BLM claimed repayment of the tax under the exemption set out in Article 12(1) of the UK/Ireland Double Tax Treaty. HMRC rejected the claim on the basis that Article 12(5) precluded the exemption from applying where debt claims are assigned in order to take advantage of the Treaty.

The FTT considered the question of whether Article 12(5) applied by looking at both:

• The question of law; what was the meaning of the Article provision?
• The question of fact; how did the Article apply to the facts of the case?

Supreme Court precedent sets out that the Treaty should be interpreted in good faith and in accordance with its ordinary meaning, as per Article 31(1) of the Vienna Convention of the Law of Treaties (VCLT). 

• The parties argued over how to interpret 'take advantage of'. The appellants argued for a negative construction, claiming it clearly was aimed at stopping tax avoidance through artificial steps such as treaty shopping. The respondents argued for its simplest meaning of simply 'using' the Treaty provisions, with no artificial steps or motive of tax avoidance required.

The FTT found in law that:

• SICL was capable of being a person to whom Article 12(5) applied, even though the Treaty was not being applied by them, nor were they a person resident in either contracting state. They were able to take advantage of the Treaty by obtaining a higher return for the claim (as it was worth more to a person who could reclaim the withholding tax).
• The meaning of 'take advantage of' was not restricted to artificial steps or arrangements.
• Extracts from Hansard and the Explanatory Note to the 1998 Order (enacting the 1998 Protocol) were not permissible aids of interpretation. They were only allowable in relation to UK domestic legislation and International Treaties were subject to the VCLT, which only allows bilateral supplementary aids to interpretation.
• In order for Article 12(5) to apply, the person needed to be aware of Article 12(1) and the exemption therein and to specifically have their main purpose as taking advantage of that exemption.
• The burden of proving that Article 12(5) applies rests with HMRC.

The FTT found in fact that:

• From correspondence and testimony, it was clear that BLM and SICL were aware that if SICL retained the claim, it would suffer an irrecoverable withholding tax of 20%.
• BLM were also aware that it would be able to receive 100% of the claim due to Article 12 of the Treaty. This was a matter of fact due to its Irish tax residency and was only important in that it was a factor in deciding the purchase price.
• The number of potential buyers of the claim who would also be able to recover the withholding tax meant the value of the claim was more than 80% of the value. Both SICL and BLM were aware this inflated the value of the claim. 
• SICL were only driven by getting the best price they could on the open market for the claim and in the end, agreed on a purchase price without knowing the identity of the purchaser.

The FTT held that the sole purpose of BLM acquiring the claim was to make a profit. It was not seeking to take advantage of the Treaty exemption, nor was it enabling SICL to do so. The appeal was upheld.

Useful guides on this topic

Withholding Tax
When is Withholding Tax (WHT) paid? What are the applicable rates? Are there any exemptions?

Liquidation
How do you wind up (liquidate) a company? What types of liquidation are there? What are the formalities and the tax consequences of liquidation? 

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Burlington Loan Management DAC v HMRC [2022] TC08572