UK vs Union Castle Ltd, April 2020, UK Court of Appeal, Case No A3/2018/3003 and 3004

Union Castle Ltd. claimed a tax deduction of £ 39 million related to losses on derivative contracts.

After acquiring derivative contracts, Union Castle issued bonus A shares to it’s parent company, Caledonia, which carried a dividend equal to 95% of the cash-flows arising on the close-out of the contracts. Therefore Union Castle had written off 39 million of the value of the contracts in it’s accounts.

The tax authorities disagreed that a tax loss had been suffered and issued an assessment disallowing the loss.

The Tribunal found in favor of the tax authorities.

  1. Capital transactions are subject of the UK transfer pricing rules.
  2. Issuing of shares meets the requirements of “making or imposing conditions in commercial and financial relations” as required by Article 9 of the OECD Model Convention.
  3. OECD TPG apply to debt financing.
  4. Share transactions, which have an effect on income taxation, must be within the UK transfer pricing rules.

The Cases was then brought before the Court of Appeal where the appeals were dismissed.

“The overall result, if my Lords agree, is that both appeals are dismissed. In the case of Union Castle’s appeal, I agree with the UT’s conclusions on the “loss” and “arise from” issues, but I have come to a different conclusion on the “fairly represent” issue and I would dismiss the appeal on that ground as well as on the “arise from” issue.”


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