Can a foreign tax authority sue for money it says it paid out because it was deceived? The answer depended on what the Danish authority was trying to recover. On its pleaded case the defendants had never paid the tax for which they claimed refunds. The Supreme Court had to decide whether the English proceedings amounted in substance to collecting Danish tax.
The claims and the earlier decisions
The Danish tax authority alleged that 4,590 applications falsely claimed refunds of dividend withholding tax. A genuine recipient of Danish dividends might be entitled under a treaty to recover tax withheld at source. The authority alleged that these applicants owned no relevant shares, received no dividends and suffered no withholding. It said it had paid out about DKK 12.09 billion, around £1.44 billion, on those applications. The defendants denied liability. The Court assumed the pleaded case could be proved solely to decide whether the claims could be heard.
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Andrew Baker J held the claims inadmissible under the principle that an English court will not entertain an action for the direct or indirect enforcement of a foreign penal, revenue or other public law. The Court of Appeal allowed the authority’s appeal. The Supreme Court appeal concerned only that admissibility issue. For the preliminary issue, the pleaded facts had to be assumed to be provable.
Why the revenue rule did not apply
Lord Lloyd-Jones, with whom Lord Hodge, Lord Briggs, Lord Hamblen and Lord Richards agreed, treated the revenue rule as limited to proceedings in which a foreign authority seeks, directly or indirectly, to recover tax that is due. That limit follows from the rule’s rationale: enforcement of a tax claim is an assertion of the taxing State’s sovereign authority within another State’s territory. Where no tax is due, there is no such assertion. Foreign tax law may still be recognised where that does not amount to enforcement.
On the pleaded case, genuine shareholders had already paid all the tax due. The applicants had never been liable to Danish withholding tax and had never paid it. The sums paid out were therefore not refunds of tax, and the proceedings were not an indirect claim for fraudulently evaded tax. They were claims by an alleged victim of fraud for damages and restitution. Making a false refund application could not turn the applicants into taxpayers or allow them to rely on their own alleged wrongdoing. The claims rested on English private-law causes of action, or alternatively Danish private law, not on a Danish statutory duty to repay tax. The Danish tax system supplied the setting and opportunity for the alleged fraud, but examining it for that purpose was recognition, not enforcement.
Why the wider public-law rule did not apply
The same conclusion followed under the broader rule against enforcing a foreign public law. Denmark’s creation and operation of the withholding-tax regime were prior sovereign acts, but they were only background. In substance, the authority was not enforcing a prerogative or vindicating a sovereign right. It was seeking to recover money it said had been taken by fraud, a claim of a kind open to a private person. Seeking to invalidate the payments for fraud was not an attempt to uphold them as sovereign acts. The authority’s use of international mutual-assistance arrangements to obtain information did not give it a special advantage in the litigation and was peripheral to the character of the claims.
International arrangements for mutual assistance in collecting tax were also irrelevant. They provide additional means of recovering tax that is due. They do not bar other proceedings, and these claims did not seek tax owed by the defendants.
Verdict: The Court unanimously dismissed the defendants’ appeal. The Danish authority could pursue its private-law claims in the Commercial Court. The ruling on admissibility did not establish fraud, liability or the amount recoverable.
