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Tax Treaty non-discrimination provisions considered in two recent UK group relief judgements

The courts found in the Felixstowe Dock and FCE Bank cases that denying the group relief between two UK resident companies was not in line with the Tax Treaty non-discrimination provision where the UK companies were held through a non-UK parent. Both cases concerned group relief between UK companies – cross border group relief was not claimed.

In the FCE Bank case UK group relief was claimed by two UK resident companies that were subsidiaries of a US company. The claim was refused because according to UK law the companies were not members of the same group as their parent company was not a UK resident. The claimants argued that the non-discrimination clause of the Tax Treaty between the UK and US prohibited such discriminatory treatment and the group relief should be allowed also for UK resident companies held by a US parent. HMRC argued that the relief was denied on the grounds that the US company was not subject to taxation in the UK not because of its US residency. The court agreed with the argumentation of the claimants and decided that relief was denied because of the US residency of the parent company and not because of it not being subject to UK tax, which in turn made the refusal of the group relief contrary to the non-discrimination clause of the Tax Treaty.

In the Felixstowe Dock case the consortium relief was claimed by UK group companies linked by a Luxembourg company. According to the UK domestic rules, the linking company had to be resident in the UK or carry out business through a permanent establishment in the UK. The claimants in the case argued that such a requirement was in breach of the freedom of establishment of the Treaty on the Functioning of the EU (TFEU) as well as the non-discrimination clause of the Tax Treaty between Luxembourg and the UK. The UK court confirmed that the UK rules were in breach of the tax treaty non-discrimination clause similarly to the FCE Bank case.

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