Global Daily Tax News, Court Clears Denmark To Pursue UK Taxpayers For Cum-Ex Fraud, (Nov 16, 2023)

The UK Supreme Court has ruled that the Danish Customs and Tax Administration may pursue UK taxpayers through the UK courts for the repayment of ill-gotten tax refunds.

The Danish Customs and Tax Administration (SKAT) has issued claims in England and Wales against a number of parties, including the appellants in the appeal before the Supreme Court.

In its claims, SKAT alleges that these parties have submitted fraudulent applications for tax refunds to which they were never entitled.

Non-residents of Denmark who receive dividends from Danish companies are liable to pay 27 percent tax on the dividends, which SKAT withholds when the dividends are first paid out. It is possible to apply for a refund of that tax in certain circumstances.

SKAT alleges that the appellants owned no shares in any relevant Danish companies, received no dividends on any such shares, and therefore could not have owed any tax or been owed any refunds. Nevertheless, they applied for and were paid tax refunds, with a total of GBP1.44bn at stake.

When SKAT brought proceedings in the Commercial Court in England and Wales, the appellants defended the claims on the basis that they were protected by a principle of private international law, under which claims which seek to enforce the tax law of a foreign state, whether directly or indirectly, are inadmissible before courts in the UK. This principle is known as the revenue rule.

The Commercial Court considered as a preliminary issue whether the revenue rule applied. In April 2021, it held that SKAT's claims fell within the scope of the rule and were therefore inadmissible. SKAT appealed to the Court of Appeal.

In February 2022, the Court of Appeal reversed the decision of the Commercial Court. It held that SKAT's claims did not fall within the scope of the revenue rule. This was because the money sought by SKAT was not unpaid tax or tax at all, but rather money which SKAT alleged had been taken by fraud.

The appellants appealed to the Supreme Court, which has again returned a ruling in favor of the Danish tax agency.

As explained in a summary prepared by the Supreme Court, "there is a well-established and almost universally applied principle that the courts of one country will not enforce the tax laws of another country."

"In general terms, the rule prevents direct enforcement, where a foreign state seeks to rely on its own law or rules to obtain the money or property sought, as well as indirect enforcement. Indirect enforcement includes claims where the foreign state seeks a remedy which is not formally based on foreign tax law, but is in substance designed to give that law effect outside the foreign state itself."

"The Court accepts the argument made by SKAT that the revenue rule only applies to proceedings where there is an unsatisfied demand for tax which the foreign tax authority seeks to recover directly or indirectly."

"Applying that conclusion to the facts of this case, SKAT's claim is not for unpaid tax nor is it a claim that the appellants are liable to SKAT because they have cheated SKAT out of tax which was due to it. SKAT's case is that the appellants have never been liable to pay any tax in Denmark."

"Instead, the substance of its claims is that the appellants defrauded SKAT to obtain refunds to which they were never entitled, and SKAT has brought its claims as a victim of fraud. Accordingly, SKAT's claims fall outside the revenue rule."

The Supreme Court concluded that the revenue rule does not apply to SKAT's claims. This means that SKAT's claims against the appellants can proceed to a trial in the Commercial Court.

The case concerns cum-ex tax fraud, a EUR55bn fraud uncovered in 2012. Initially thought to have only affected Germany, it emerged that numerous EU member states were heavily affected, including Finland.

The fraud revolved around banks facilitating the buying and then reselling of shares belonging to foreign investors on the dividend pay-out day. The speed with which these transactions were carried out and the lack of communication between authorities meant that tax administrations struggled to identify the shares' real owners. This then exposed the authorities to fraudulent claims, for tax refunds from foreign persons who pretended to have paid a dividend tax, which, as foreigners with a fictitious proof of having paid tax elsewhere, they could recover. Often, tax authorities reimbursed an unpaid tax many times over.