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Burlington Loan Management DAC: Treaty Shopping Provisions Did Not Apply

The UK’s First-tier Tribunal recently held that the payment of interest received by Burlington Loan Management DAC (“BLM”) (an Irish tax resident company) was not to be denied the benefits of the relief afforded under the interest article of the UK-Ireland double tax treaty (the "Treaty"). 

The facts in this case were relatively simple. SAAD Investments Company (“SICL”), a Cayman company, had a debt claim against Lehman Brothers International (Europe) (“LBIE”), a UK company. LBIE was part of the Lehman Brothers group and was in administration. Whilst the principal amount of the debt claim had been paid, the interest amount remained unpaid. SICL was similarly in liquidation, and the liquidators had engaged Jefferies to sell SICL’s claim. As part of this process, the claim was sold from SICL to Jefferies and then from Jefferies to BLM. LBIE paid the claim to BLM net of withholding on account of UK income tax.

BLM applied to HMRC for a refund of that tax under Article 12(1) (being the interest article) of the Treaty. However, HMRC argued that Article 12(5) of the Treaty, which denied the benefits where “the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment” operated so as to deny BLM's claim for relief. 

HMRC considered that the Treaty did not apply as at least one of the companies had a main purpose of taking advantage of the relevant interest article in the Treaty. In particular, HMRC considered that the pricing of the transactions, under which the benefit of BLM not being subject to withholding on account of UK income tax was shared with SICL, recognised that both SICL and BML knew that only SICL would be subject to withholding on account of UK income tax.

The FTT held that the sole purpose of BLM in acquiring the claim was to make a profit, notwithstanding that, among other things, BLM and SICL were both aware that payments of interest to SCL would be subject to withholding on account of UK income tax and that BLM would be entitled to 100 per cent of the claim where relief was obtained under Article 12 of the Treaty.

The decision of the FTT represents a sensible decision for the taxpayer here, especially considering that the sale of the claim was to an unconnected party. The decision of the FTT will no doubt be of interest to advisers and taxpayers given that no abusive or artificial steps were involved as part of the transaction and in light of the introduction of the principal purpose test as part of the OECD’s Multilateral Instrument.   

 

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