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14 June 20245 minute read

UK Upper Tribunal rules on the scope of double taxation treaty abuse

The Upper Tribunal in Burlington Loan Management DAC (2024) UKUT 00152 (TCC) has agreed with the First-tier Tribunal that acquiring a debt claim, and taking the availability of treaty relief into account in the acquisition price, did not lead to denial of relief through the ‘main purpose’ test in the relevant article of the double taxation treaty. The UT did, however, disagree with aspects of the FTT reasoning.

This appeal concerned a ‘main purpose’ test now superseded by a ‘principal purpose test’ in article 7 of the OECD Multilateral Convention. However, the increased importance of “purpose” tests following the MLI, and the previous absence of judicial authority in the UK in the treaty context, means that the case is likely to be scrutinised by advisers where such tests are applied.

The judgement concerned the assignment of a debt claim owed by Lehman Brothers International (Europe) in respect of accrued interest. The assignor was a Cayman Islands company and the interest payable on it was prima facie subject to UK withholding tax at 20% (there being no relief under the Cayman treaty). The purchaser of the debt claim, Burlington Loan Management (BLM), was resident in Ireland. The UK/Ireland treaty had a complete exemption from UK withholding tax for interest paid to an Irish resident.

HMRC (the UK tax authority) argued that treaty relief was not available to the taxpayer because article 12(5) of the interest article provided that treaty relief from withholding tax would not be available “if it was 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.” (emphasis added).

The treaty “main purpose” test was, therefore, concerned with the subjective intentions of both the parties and the courts accepted that this required an enquiry beyond the stated subjective intentions. Subconscious purposes were capable of amounting to ‘purposes’ under the treaty test particularly since “some consequences of an action are so inevitably and inextricably involved in the action that, unless merely incidental, they must be taken to be a purpose of that action.” Both FTT and UT also concluded that the object and purpose of the treaty was such that article 12(5) could not be confined solely to cases which involve ‘artificial’ steps or arrangements (such as a “conduit” arrangement). The UT, however, rejected (as an “unjustified gloss”) FTT’s conclusion that the ‘main purpose’ test in the treaty article could only be met if the seller of the debt knew that the purchaser was entitled to the benefit of the specific treaty relief rather than that the purchaser had some kind of exemption from withholding tax. It could be inferred from the economics of the transaction that the parties were aware that buyers offering more than 80% of the face value (of the interest-only debt claim) would somehow not be subject to UK withholding tax.

The UT nevertheless rejected HMRC’s appeal because, broadly, the treaty was concerned with the allocation of taxing rights between two states and article 12 (5) was not, as HMRC would have it, to be read as if it were a provision in a UK statute providing for a UK tax advantage to be eliminated if a party had a main purpose of avoiding UK tax. The question of the application of article 12(5) had to be answered by reference to both contacting states. HMRC’s arguments, would, in the view of the UT, have turned article 12(5) into something fundamentally different, a provision aimed at the avoidance of UK tax. The question was whether the treaty was abused. In the UT’s view, the claimed existence of arbitrage was merely an element to be weighed in the balance. The treaty was the setting in which the assignment took place and there was nothing abusive in BLM, as a (long-term) Irish tax resident, which beneficially owned the interest, taking the benefit of the UK/Ireland treaty. Availability of treaty relief was merely ‘part of the scenery’ as the FTT had concluded.



In addition to being a welcome decision for the secondary debt market, this judgement indicates that treaty ‘purpose’ tests must be looked at quite differently from domestic ones; the objective of a treaty is the allocation of taxing rights between states, not whether to tax something in the first place. However, there were many factors in the factual matrix of this case pointing in the taxpayer’s favour such as the seller and buyer being long established in their respective jurisdictions and operating on arms’ length terms in a genuine economic transaction. It will be interesting to read judicial guidance on where to draw the line between abuse and legitimate use of a treaty in a case where the facts are a little more finely balanced.