The spectre of Albert Venn Dicey, the greatest of Victorian constitutionalists, looms large at the feast. In Skatteforvaltningen v Solo Capital Partners, the UK Supreme Court held that the Danish revenue authority (SKAT) was not precluded by reason of Dicey’s ‘revenue rule’ from bringing claims in England to recover refunds of Danish withholding tax that (SKAT alleges) it had been fraudulently induced to pay out. While opening the doors to a full trial may well be the correct outcome on these facts, we consider that the decision leaves some uncertainty as to how exactly the revenue rule is to be applied. 

Cum/ex schemes

Readers may recall the ‘cum/ex’ scandal of the 2010s. Complex series of transactions were entered into in respect of shares around the dividend payment date with the aim of generating claims for multiple refunds of dividend withholding tax where that tax had been withheld (and paid to the tax authority) only once. In this way, SKAT alleges it was induced to pay out over £1.5 billion in “tax refunds” to a large number of what we shall call “purported shareholders” who never actually suffered the withholding tax. 

The decision at hand

Unsurprising, then, that SKAT should seek to recover those sums from those purported shareholders by bringing civil proceedings against them in England, the US and Malaysia. 

One of the preliminary issues to be resolved before a full hearing in the proceedings in England was whether SKAT’s claims were inadmissible on the basis of Dicey’s Rule No. 20 (formerly Rule No. 3):

“English courts have no jurisdiction to entertain an action: (1) for the enforcement, directly or indirectly, of a penal, revenue or other public law of a foreign state;” (paragraph 8R-001, Dicey, Morris & Collins, The Conflict of Laws (Sweet & Maxwell, 16th ed, 2022)).

The Supreme Court found that SKAT was not seeking to recover taxes due under Danish law and thus the claim was not barred as an action to enforce a revenue law (the ‘revenue rule’). No relationship of taxpayer-tax authority ever existed with the purported shareholders: no tax was ever due from them or refundable to them. Rather, as Sir Julian Flaux C put it in the Court of Appeal’s judgment, it was as though SKAT was seeking to recover money which the purported shareholders had stolen by breaking into its safe (an analogy quoted with approval by the Supreme Court). 

In addition, the Supreme Court agreed with the Court of Appeal that the claim was not an action to enforce a public law in breach of the broader principle of Rule 20 (the ‘sovereign powers rule’). Although the Danish tax system provided the context for SKAT’s claim, that claim nonetheless remained a patrimonial one, founded on causes of action that would have been available to any similarly defrauded private citizen, and not on an act of state. 

When does the revenue rule apply?

The Supreme Court was at great pains to stress that the purported shareholders’ allegedly fraudulent behaviour cannot in and of itself change the character of the claim so as to put it beyond (or bring it within) the scope of the revenue rule.

Lord Lloyd-Jones set out that the “revenue rule only applies to proceedings in which there is an unsatisfied demand for tax which foreign tax authorities seek directly or indirectly to recover…If there is no claim, directly or indirectly, to recover tax which is due, there is no attempt to assert the sovereign authority of the State which imposed the taxes within the territory of another” (paragraph 36). He considered that, on the facts as pleaded by SKAT, a “complete answer to the [purported shareholders’] objection under the revenue rule to the admissibility of this claim is provided by the fact that there are no taxes due from the [purported shareholders]” (paragraph 39). 

However, in its discussion of the CJEU decision in Sunico, the Supreme Court appears to indicate that this may not be a “complete answer” to the revenue rule in all circumstances. Civil proceedings in respect of unpaid VAT were brought against Sunico on the basis that it had been part of a fraudulent conspiracy; it was not alleged that Sunico had been liable for the tax itself. Nonetheless, Lord Lloyd-Jones commented that, if brought by a foreign tax authority in respect of foreign VAT, in English law such proceedings would have been “an inadmissible claim [under the revenue rule] for the indirect enforcement of foreign tax laws”. 

One might say the distinction is simply whether there is any “unsatisfied demand for tax”: in Sunico the VAT remained unpaid, whereas in the present case, the withholding tax had presumably been paid – after all, cum/ex schemes rely on that fact.

However, in our view, the distinction instead rests on tax recovery versus fraud recovery – and therefore, what it means to “seek directly or indirectly to recover” tax. Thus, SKAT’s claim was neither directly enforcing a demand for tax against the purported shareholders, nor indirectly enforcing a demand for tax against the person actually liable for the withholding tax. It was simply for payments paid out in error. Let us consider three scenarios.

Scenario 1: the dividend payer pays a net dividend of £80, passing on the £20 withheld to the tax authority. A third party (who is not a shareholder) succeeds in making a fraudulent refund application; having paid out, the tax authority sues the third party to recover the refund. These are, broadly, the facts of the present case: there is no underpayment of tax but there is a fraud. This plainly does not fall within the revenue rule.   

Scenario 2: again, the dividend payer pays a net dividend of £80, passing on the £20 withheld to the tax authority. The shareholder makes a fraudulent refund application (e.g. by faking a certificate of residence from a treaty jurisdiction) when, in reality, they were not entitled to a refund at all. Having paid out, the tax authority sues the shareholder to recover the refund. Again, there has been both tax paid and a fraud, and so one might think the claim falls outside the scope of the revenue rule (that is, as with Scenario 1, the claim against the shareholder is in respect of the fraud, and not an indirect claim for tax). But in our view it is relevant that unlike Scenario 1, the claim is against the party liable for the withholding tax: in trying to recover the wrongly paid refund, the tax authority is seeking to enforce its right to tax the shareholder £20. If that is right, the claim should be barred by the revenue rule. 

Scenario 3: the dividend payer pays a gross dividend of £100 to the shareholder. It neither withholds nor accounts to the tax authority for the withholding tax due. As with Scenario 2, the shareholder makes a fraudulent refund application and, having paid out, the tax authority sues the shareholder to recover the refund. There is both an underpayment of tax and a fraud and, correspondingly, two claims: a claim for the £20 underpayment of withholding tax, and an additional claim to recover the £20 refund. The former is clearly a direct claim for tax that should be barred by the revenue rule. The latter is more complex. In our view, since there was never any withheld tax in respect of which the “refund” of £20 took place, this claim is more akin to Scenario 1 than Scenario 2, notwithstanding the fact that it is the shareholder that is both in receipt of the gross dividend and makes the fraudulent refund application – therefore, the claim for the refund does not amount to enforcing a right to tax the shareholder £20. 

If that is correct, it might have been spelled out more clearly and it would have been interesting to see a fulsome discussion as to what extent it matters whether the withholding tax is a charge on the dividend payer or essentially a collection mechanism for tax chargeable on the payee. 

Does it matter how SKAT obtained evidence? 

The purported shareholders submitted that SKAT’s claims were rendered inadmissible by the sovereign powers rule, as SKAT had used sovereign powers to obtain information (in particular through mutual assistance provisions under double tax treaties). Looking back at the Court of Appeal’s decision, that argument was based on an analogy with the Brussel-Lugano regime, which distinguishes between "civil and commercial matters" (within the scope of the Brussels Regulation and Lugano Convention) and "revenue, customs or administrative matters” (which are outside). 

In Sunico, Advocate-General Kokott (cited with approval by the CJEU) had indicated that, if information obtained using sovereign powers is admissible in civil proceedings, this would prevent them from being civil matters for the purposes of the Brussels-Lugano regime. However, according to the Court of Appeal, later European case law had refined this test. For instance, it was stated in Movic that a public authority would only be taken to have exercised public powers where, due to the way it adduced evidence, “it is not specifically in the same position as a person governed by private law”. 

On the facts, the Supreme Court agreed with the Court of Appeal that SKAT had not sought to use the information in the proceedings “so as to give itself some special advantage only available to a sovereign body”. However, it indicated that the concept of “sovereign power” may in fact be narrower than the concept of “revenue, customs or administrative matters”, and that the manner in which evidence has been obtained is therefore less relevant under the sovereign powers rule than the Brussels-Lugano regime: “whether the respondent’s claims fall within the scope of [that rule] is a question of the characterisation of the substance of the claims brought. The use of powers of investigation is, at most, of merely peripheral significance in that regard” (paragraph 61). 

It is not clear whether the Supreme Court would have found SKAT’s use of sovereign powers merely “a matter of peripheral significance” had they in fact had the effect of putting SKAT in a different position to a private person. If the sovereign powers rule is to be applied in the same way as the revenue rule, then the use of sovereign powers cannot, as the Supreme Court says, change the “characterisation of the substance of the claims”. However, while the Supreme Court characterises the sovereign powers rule as a “broader principle reflected in… Rule 20”, it was not required expressly to consider whether an application of the sovereign powers rule requires (as with the Brussels-Lugano regime) an assessment of the power imbalance between a tax authority and a respondent taxpayer. If so, to state that it is of “merely peripheral significance” where a foreign public authority has, on the facts, obtained some special advantage would be to stack the cards rather regrettably against the taxpayer.

For now, any such difference may be of more academic than practical interest, given that, following Brexit, the Brussels Regulation no longer applies to the UK and the UK ceased to be a member of the Lugano Convention. However, the UK government signed the Hague Convention 2019 on 12 January 2024. Given that similarly applies “to the recognition and enforcement of judgments in civil or commercial matters [but not] revenue, customs or administrative matters”, the courts may yet need to consider the extent of any divergence.