On 27 April 2021, Mr Justice Andrew Baker handed down judgment in the case of Skatteforvaltningen (the Danish Customs and Tax Administration) v Solo Capital Partners LLP & Ors  EWHC 974 (Comm), following a four-day trial in March 2021. The case was featured in The Lawyer’s Top 20 cases of 2021.
The case is believed to be the first in any jurisdiction in which the courts have considered how the “Revenue Rule” principle expressed in Dicey Rule 3 applies to civil claims where a foreign State seeks to recoup payment for tax refunds which it argues were not properly due.
The case concerns claims brought by the Kingdom of Denmark through the Danish national tax authority (“SKAT”) for the recovery of over £1.5 billion against 114 individual and corporate defendants. SKAT claimed to have been induced by fraudulent misrepresentations, between 2012 and 2015, to pay out c. DKK 12.5 billion in dividend withholding tax (“WHT”) refunds, in circumstances where, it claimed, such refunds were not in fact due. It pursued civil claims in England alongside proceedings in a range of other jurisdictions.
The High Court ordered a trial of a preliminary issue to determine whether Denmark’s claims were inadmissible by reason of Rule 3 of Dicey, Morris and Collins on The Conflict of Laws, often known as the Revenue Rule, which states that:
English courts have no jurisdiction to entertain an action:
(1) for the enforcement, either directly or indirectly, of a penal, revenue or other public law of a foreign State; or
(2) founded upon an act of state.
Following a four-day trial in March 2021, in its judgment of 27 April 2021 the Court conducted a detailed review of the history and scope of Rule 3, and held that:
- The basis for the Rule is that the English courts will not entertain claims by foreign States which amount to an extra-territorial assertion of the State’s sovereign powers. The critical issue is whether, in bringing a claim, a claimant is doing an act which is of a sovereign character or which is done by virtue of sovereign authority; and whether the claim involves the exercise or assertion of a sovereign right. If so, then the courts will not determine or enforce the claim.
- In applying Rule 3, the courts must consider the substance of the claims, not simply their form. This requires the Court to look past the causes of action pleaded and to identify the underlying right which the claimant seeks to vindicate, to determine whether the litigation amounts in substance to an exercise of sovereign power.
Applying these principles to the facts, the Court held that:
- Making WHT refund payments is an integral part of the functions of a sovereign tax authority, and the return of WHT refunds is in substance a repayment of tax, the entitlement to which, if any, derives from Denmark’s power to tax individuals and companies as a sovereign State.
- Accordingly, the English civil claims amounted to an attempt indirectly to enforce Denmark’s sovereign authority outside its territorial limits. As a result, applying Dicey Rule 3, all of SKAT’s claims against the 114 defendants are inadmissible and fall to be dismissed. This terminated the lengthy and substantial proceedings (which were listed for a full court year if they had proceeded to trial).
A link to the judgment can be found here.