Memec plc v. IRC, [1998] BTC 251, [1998] EWCA Civ 941 (CA)

In order to minimize German corporate tax payable by its German subsidiary ("GmbH"), the taxpayer "Plc"), which was a UK company, formed a silent partnership (stille gesellschaft) with GmbH, which entitled it to annually receive most of the profits of Gmbh. In order for Plc to receive a UK foreign tax credit for local trade tax payable by subsidiaries of GmbH, it was necessary to conclude either that (1) the silent partnership was fiscally transparent, so that GmbH as the silent partner was to be treated for UK corporation tax purposes as entitled to a share of the dividends paid by the GmbH subsidiaries to GmbH (all of which, in turn, were paid to Plc), or (2) that the share of the profits of the silent partnership paid to Plc could be treated as dividends paid by GmbH to Plc.

After finding against Plc on the first issue, Peter Gibson LJ found that an extended definition of "dividend" in the Article of the UK-German Treaty respecting withholding tax (which included a participation in a silent partnership) did not extend to the relevant Article of that Treaty according the UK foreign tax credit. In the absence of the extended definition applying, Plc's share of GmbH's profits under the silent partnership did not qualify as a dividend under the ordinary meaning of that term (p. 262):

The ordinary meaning of 'dividend' is that it is a payment of a part of the profits for a period in respect of a share in a company (Esso Petroleum Co Ltd v Ministry of Defence [1989] BTC 500 at p. 502; [1990] Ch 163 at p.165)....To treat Plc's entitlement to a share of the profits of GmbH under the silent partnership as a dividend, when that payment was unrelated to shares in GmbH and the partnership is not a company, would be inconsistent with the ordinary meaning of 'dividend'.

In order to minimize German corporate tax payable by its German subsidiary ("GmbH"), the taxpayer, which was a UK company, formed a silent partnership (stille gesellschaft) with GmbH, which entitled it to annually receive most of the profits of Gmbh. In order for the taxpayer to receive a UK foreign tax credit for local trade tax payable by subsidiaries of GmbH, it was necessary to conclude either that (1) the silent partnership was fiscally transparent, so that GmbH as the silent partner was to be treated for UK corporation tax purposes as entitled to a share of the dividends paid by the GmbH subsidiaries to GmbH (all of which, in turn, were paid to the taxpayer), or (2) that the share of the profits of the silent partnership paid to the taxpayer could be treated as dividends paid by GmbH to the taxpayer.

Respecting the first issue, Peter Gibson LJ stated (at p. 258) that the court was required

to consider the characteristics of an English or Scottish partnership which make it transparent and then to see to what extent those characteristics are shared or not by the silent partnership in order to determine whether the silent partnership should be treated for corporation tax purposes in the same way.

In applying this test he noted that although a silent partnership (like an English partnership but not a Scottish partnership) was not a separate legal entity, the silent partner did not have any proprietary right in the shares of the subsidiaries or in the dividends arising on those shares (albeit, not a strong point of contrast with a Scottish partnership), it did not (unlike a partner in a Scottish partnership) have even an indirect interest in the profits of the silent partnership as they accrued or in the assets, with its interest instead being purely contractual, and the business was solely that of the GmbH rather than the business being carried on with the silent partner in common with a view to profit.

As the second argument also failed, the taxpayer's appeal was dismissed.