Court of Appeal draws distinction between claims for recovery of tax and restitution for tax paid out fraudulently

07 April 2022. Published by Alan Williams, Partner

In Skatteforvaltningen v Solo Capital Partners,(1) the Court of Appeal investigated in detail the operation of rule 3(1) of Dicey, Morris & Collins on the Conflict of Laws (edition 15) (Dicey rule 3), which provides that English courts do not have jurisdiction over actions for "the enforcement, either directly or indirectly, of a penal, revenue, or other public law of a foreign State".

The Court decided that the Danish tax authority's claim did not fall within Dicey rule 3 as it concerned the restitution of monies misappropriated by fraud rather than enforcement of tax.


This case was an appeal by the Danish tax authority (SKAT) to recover £1.44 billion of refunds of Danish withholding tax, which it had paid out to the defendants. Denmark-domiciled companies are taxed withholding tax on dividends, which can be repaid by SKAT to foreign shareholders of relevant countries in which double taxation treaties exist. But a dividend arbitrage scheme known as “cum-ex” took advantage of loopholes in the processes of share lending and settlement to make it appear that there were multiple owners of the shares, all entitled to the same rebate of withholding tax, thereby inducing SKAT to pay out in excess of the withholding tax actually collected in respect of each share. There are a number of proceedings involving withholding tax currently due to the cum-ex fraud sweeping Europe.

It was alleged that the defendants conspired in the cum-ex trading schemes in order to induce SKAT to pay out refunds. SKAT alleged that the refunds it had paid out under the scheme were induced by fraudulent misrepresentations that each of the rebate claimants was, at the relevant time, a shareholder of Danish companies, when in fact they were not. This would mean that the rebate claimants did not receive the dividends from the shares in the Danish companies from which withholding tax was deducted, meaning that there was no relevant withholding tax payment for SKAT to refund. SKAT brought claims against the defendants for, among other things, deceit, fraudulent misrepresentation, unlawful means conspiracy, dishonest receipt and knowing receipt.

High Court

The preliminary issue as to the application of Dicey rule 3 to SKAT's claim was heard in March 2021.  At first instance, Andrew Baker J concluded that all of SKAT's claims were rendered inadmissible by Dicey rule 3. He noted that the issue of whether the rule applied was "a question of characterisation" and that two particular types of claim specific to foreign revenue would fall within Dicey rule 3's ambit: 

  • if the claim aimed to enforce Danish revenue law (Government of India(2) applied); or 
  • if the claim amounted to an attempt to exercise sovereign power extra-territorially (Mbasogo v Logo(3)). 

These characterisations are referred to as the "revenue rule" and the "sovereign powers rule", respectively.  

The judge decided that this was a claim which aimed to enforce Denmark's sovereign right to tax and therefore was not admissible in English courts as it came within the "revenue rule" as per the analysis in Government of India. He considered that, in the present case, the purpose of SKAT's claim was to "vindicate that sovereign right" to tax and enforce its right to keep the withholding tax rather than refund it to the defendants, even if SKAT had pleaded private causes of action rather than tax law ones.

SKAT appealed this decision on the basis that its claim did not fall within the scope of Dicey rule 3, as the claim was wider in scope than merely enforcing a right to tax. 

Court of Appeal

Comprising Sir Julian Flaux, Phillips LJ and Stuart-Smith LJ, the Court of Appeal allowed the appeal. It agreed with Andrew Baker J that Dicey rule 3 did not allow the enforcement of a claim for tax that was due in the English courts (the revenue rule), nor did it allow a claim involving the exercise of a sovereign right (the sovereign powers rule). It therefore had to investigate whether the purpose of this claim was to recover foreign revenue. 

In the Court of Appeal's analysis, the claim was not to recover revenue for the following reasons:

  • The purported shareholders had never been liable to pay withholding tax to SKAT, as they had never, in fact, been shareholders of eligible companies.
  • The funds SKAT had paid to defendants were not a refund of tax, but an "abstraction of SKAT's funds", in the same way as if the funds had been stolen from SKAT.
  • The claim was therefore not a claim to recover tax but a claim to seek remedies for fraud, and even though issues of Danish tax law would inevitably be analysed in detail at trial, this did not mean that the claim was automatically converted into a revenue claim under Dicey rule 3
  • Furthermore, there was no tax due from the defendants or purported shareholders, which was the basis for the historical cases' classification of the revenue rule. 

Regarding the sovereign powers rule, the Court found that SKAT was not enforcing a sovereign right by bringing a claim to recover monies misappropriated due to fraudulent misrepresentations. This was an action that any victim of fraud would be entitled to take and, at any rate, there was no taxpayer/tax authority relationship between SKAT and the defendants to invoke a sovereign power. Dicey rule 3 therefore did not apply to this case. 


The Court of Appeal took this opportunity to draw a marked contrast between a foreign state's tax authority trying to enforce their right to collect unpaid tax in the English courts, and a claim seeking remedies for fraud. The historic authorities on the issue of how Dicey rule 3 operates have tended to be based on claims where unpaid tax was due – indeed, Andrew Baker J at first instance observed that there are no authorities on this rule where a tax authority is trying to recoup a tax refund paid erroneously. 

Foreign tax and customs authorities may well view this relatively untrodden (albeit niche) path with interest as the Court of Appeal's judgment clarifies the claims under tax law in which the English courts may establish jurisdiction and narrows the scope of Dicey rule 3 further than the High Court had initially been prepared to do. Following the Court of Appeal's decision (and subject to any further appeal to the Supreme Court), the proceedings will continue to trial in the High Court as one of the most significant fraud claims currently in progress in this jurisdiction.

1Skatteforvaltningen (Danish Customs and Tax Divisions) v Solo Capital Partners LLP (in Special Administration) [2022] EWCA Civ 234.
2Government of India v Taylor [1955] AC 491.
3Mbasogo v Logo Ltd (No.1) [2006] EWCA Civ 1370.

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