News of Note

BLM was a substantial Irish-resident investment company, which had been acquiring proved claims in the administration of Lehman Brothers International (Europe) ("LBIE" – a UK resident) since 2011. In 2018, an unrelated Caymans company (“SICL”), which was in liquidation, instructed a third-party broker to market its claim for post-administration interest from LBIE (the “SAAD Claim”). As a result, BLM purchased the SAAD Claim for a cash amount which exceeded the expected cash payment from LBIE as reduced by the UK withholding tax of 20% but, after receiving a refund of such withholding tax pursuant to Art. 12(1) of the UK-Ireland Treaty, would generate an 8% profit. There would have been no refund of the UK withholding tax had the SAAD Claim continued to be held by SICL when paid.

HMRC denied BLM’s refund claim on the basis of Art. 12(5) of that Treaty, which excluded the application of Art. 12 “if it was the main purpose or one of the main purposes of any person concerned with the … assignment … to take advantage of … Article [12].”

In confirming the conclusion of the First-tier Tribunal that the assignment did not engage Art. 12(5), the Upper Tribunal indicated that it did not discern reviewable errors in the findings of the FTT, which most relevantly, and as summarized by the UTT, were that:

• It was evident from the OECD commentaries that Art. 12(5) should be regarded as aimed at transactions involving conduits or treaty shopping.
• Here, by contrast, SICL did not retain any direct or indirect entitlements in respect of the SAAD Claim, and it “was Ireland who had full taxing rights over the interest beneficially owned by BLM” and “from BLM's perspective, it regarded its beneficial ownership of the interest in respect of the SAAD Claim in the same way as it regarded its beneficial ownership of all the other interest in respect of all the other debt claims in the LBIE administration” which it had acquired and whose eligibility for the Treaty reduction had not been challenged.
• Furthermore, "for BLM the existence of the UK-Ireland treaty was simply the setting in which the Assignment took place”.
• “It was appropriate for the FTT to have had regard to the fact that there were potential purchasers of the SAAD Claim for whom UK WHT would not have been an issue and for whom the UK-Ireland treaty would not have been relevant [e.g., UK purchasers with tax losses, or pension plans] … who were prepared to pay a price higher than 80% of the interest on the SAAD Claim for reasons wholly unconnected to the UK-Ireland treaty”.
• “SICL's only purpose in entering into the transaction was to sell the SAAD Claim for the best available price”, and similarly the “’sole purpose of BLM in acquiring each such claim, including the SAAD Claim, was to realise a profit by reference to the difference between its purchase price and the cash flows that it received as result of its acquisition of the relevant claim’”.

Neal Armstrong. Summary of Revenue & Customs v Burlington Loan Management DAC [2024] UKUT 152 under Treaties – Income Tax Conventions – Art. 12.

The trust deed for an alter ego trust provided that no capital distributions, including any capital gains, could be made while the settlor (who also was a trustee) was alive, that all decisions were by a majority vote of the three trustees, and did not include any provision granting the settlor the power to direct the future distributions that were to be made following the settlor’s death.

CRA indicated that, in general, these provisions did not engage s. 75(2). In particular, the settlor had no capital interest in the trust, and the settlor being one of the trustees acting by majority vote was permissible. However, s. 75(2) could still apply where the trust deed expressly required the settlor’s consent or direction with respect to any decision made by the trustees, including where decisions were made by the majority of trustees provided that that settlor-trustee was one of that majority.

Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.7 under s. 75(2).

CRA confirmed the position in IT-302R3 (archived) that where the executor, administrator, or trustee of an estate is replaced as a result of that person’s death or inability to fulfill their function, control of a corporation held by the estate would not be acquired solely as a result of that replacement. This position is not conditional on the replacement trustee being related or otherwise connected to the executor, administrator or trustee being replaced.

Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.4 under s. 251.2(2)(a).

A corporation pays wages to an individual employee who is not a shareholder but does not deal at arm’s length with a shareholder and a portion of the wages is subsequently determined to be unreasonable pursuant to s. 67. CRA indicated that the overpayment would not be included in the individual’s income under s. 15(1) because the benefit had not been conferred on the individual in a capacity of shareholder. There also would be no deemed inclusion under s. 15(1.4)(c) because the same amount had been included in the individual’s employment income.

Where such non-arm’s length employee was also a shareholder, although the overpayment would otherwise be income under s. 15(1), s. 248(28) would exclude the application of s. 15(1), so that there was no double taxation. (This seems like a departure from the traditional approach of determining whether a benefit was received qua employee or qua shareholder, and then only applying the more applicable provision.) Again, s. 15(1.4)(c) would not apply because of the s. 5 inclusion.

Neal Armstrong. Summary of 4 June 2024 STEP Roundtable, Q.2 under s. 15(1).