Aozora GMAC Investments Limited, resident in the UK, was a subsidiary of a Japanese bank. The taxpayer made a loan to its subsidiaries in the US.

Article 11(1) of the US-UK double tax treaty provided for exclusive taxation of the interest income in the UK. The benefits under the double tax treaty could only be claimed if the taxpayer was a ‘qualified person’ as set out in the Limitation on Benefits (LOB) article of the treaty (Article 23).

Article 23(6) of the treaty allowed discretion to the US IRS to grant treaty benefits even if the taxpayer was not within the definition of a qualified person, provided that taking advantage of treaty benefits was not one of the principal purposes of the taxpayer.

The taxpayer claimed nil withholding tax on the interest income from its US subsidiaries under Article 11(1) of the treaty. The US IRS denied the claim because the taxpayer was not a ‘qualified person’ as required by Article 23(1); and obtaining treaty benefits was one of the principal purposes of the loan transaction because the transaction was routed through the UK subsidiary to reduce US tax on the interest income. The US IRS did not exercise the discretionary right given by Article 23(6) of the treaty to grant the treaty benefits.

The US subsidiaries therefore withheld tax at 30% from the interest income. The taxpayer could not obtain a tax credit under the treaty as it was not a qualified person under Article 23(1).

In its UK corporation tax returns the taxpayer claimed unilateral tax relief for the US taxes against the tax due on the interest income. As a result of the unilateral claim the UK corporation tax liability was reduced to nil.

However, the UK domestic tax law denies unilateral tax relief where a treaty benefit is unavailable due to an express provision in the tax treaty. The tax authorities argued that Article 23(1) of the treaty is an express provision, so the taxpayer’s claim to unilateral relief was rejected. The taxpayer appealed against the refusal of the tax authorities to allow the unilateral tax relief claim, and the issue went to the UK First-Tier Tribunal.

The UK First-Tier Tribunal allowed the appeal of the taxpayer.

Section 793A(3) of the Income and Corporation Taxes Act, 1988 denies unilateral tax relief where a treaty benefit is unavailable due to an express provision contained in the tax treaty. However, the term ‘express’ is used in the sense of definitely formulated and explicit. For the domestic tax law provision to affect the exclusion of unilateral tax relief, the treaty state explicitly the circumstances in which the credit relief is not available.

However, the tax treaty is not explicit about the circumstances in which credit relief is not available. In particular, Article 23 of the tax treaty is not an express provision that relief by tax credit is not given. The First-Tier Tribunal therefore held that the taxpayer is entitled to unilateral tax relief in the UK for the taxes withheld by its US subsidiaries on the interest income.