Tribunal allows taxpayer's appeal in first consideration of 'main purpose' test in double tax treaty

23 November 2022. Published by Liam McKay, Senior Associate

In Burlington Loan Management DAC v HMRC [2022] UKFTT 00290 (TC), the First-tier Tribunal (FTT) considered whether a payment of interest received by the taxpayer, in respect of a debt claim, qualified for the exemption in Article 12(1) of the double tax treaty (the Treaty) between the UK and the Republic of Ireland (ROI), from UK income tax withheld at source.


Burlington Loan Management DAC (BLM), was the principal European fund investment corporate vehicle for a New York headquartered asset manager. BLM was both a tax resident of the ROI and a resident of the ROI for the purposes of the Treaty.

Lehman Brothers International (Europe) (LBI) was part of the global financial services group Lehman Brothers, which entered administration in 2008.

SAAD Investments Company Ltd (SIC) was a Cayman Island incorporated company and creditor of LBI, with a debt claim of around £142m (the Claim). Although the Claim was paid in full by the administrators of LBI in September 2016, SIC retained the right to receive all other amounts that might be payable in respect of the Claim, which essentially comprised interest of around £90m.  

SIC had itself been in liquidation since 2009, and its liquidators retained Jefferies Leveraged Credit Products LLC (Jefferies) to market the Claim. In March 2018, the Claim was assigned by SIC to Jefferies under an assignment of claim agreement and then, under a second assignment of claim agreement, it was assigned by Jefferies to BLM.

In July 2018, the administrators of LBI discharged the interest in respect of the Claim. An amount of £72m (80% of the interest) was paid to BLM, and £18m (20% of the interest) was withheld in accordance with section 874, Income Tax Act 2007. 

In accordance with Article 12(1) of the Treaty, BLM claimed a refund of the UK withholding tax withheld by the administrators of LBI. HMRC refused BLM's claim under Article 12(5), because it considered that the main purpose, or one of the main purposes, of the assignment of the Claim by SIC to BLM, was to take advantage of Article 12.

BLM appealed to the FTT.

FTT decision

The appeal was allowed. 

The sole issue in the appeal was whether it was the “main purpose”, or “one of the main purposes”, of any person concerned with the assignment of the Claim to BLM, to take advantage of Article 12. 

In terms of the approach to interpreting Article 12(5), the FTT:

Rejected the proposition that the inevitable and inextricable consequences of an action was the sole benchmark for determining the subjective purposes of the person taking that action. Instead, applying obiter comments of the Upper Tribunal in HMRC v Blackrock HoldCo 5 LLC [2022] UKUT 00199 (TCC), confirmed that the subjective purpose was to be determined by reference to all of the evidence, and the inevitable and inextricable consequences only formed part of the overall factual matrix to be considered.

Rejected BLM's argument that Article 12 only applied to persons who were resident in one of the contracting states such that the purposes of SIC could not be taken into account. In particular, BLM's interpretation ignored Article 3(1)(g), which defined "person" without reference to residence. SIC's purposes were therefore relevant to determining whether Article 12(5) applied. 

Rejected BLM's contention that Article 12(5) should be confined to artificial steps or arrangements. Whilst abusive transactions involving artificial steps or arrangements would obviously fall within the ambit of Article 12(5), it was not confined in its application to abusive transactions.

Accepted BLM's argument that to engage Article 12(5), the person must have a main purpose of "taking advantage" of Article 12(1) specifically, and a person could not have such a purpose unless the specific provision had been identified.  Merely knowing a purchaser was entitled to an exemption from UK withholding tax but without knowing the precise basis for that exemption, was insufficient to engage Article 12(5).

Confirmed that the burden of proof was on HMRC. 

Against that background, the FTT found that, taking into account all of the evidence and viewed subjectively, BLM did not have, as one of its main purposes, “taking advantage” of Article 12(1) by means of the assignment of the Claim. Rather, the UK withholding tax exemption was merely part of the “setting” in which BLM made its offer for the Claim. The fact BLM was aware it was entitled to benefit from Article 12(1) in relation to the interest payable in respect of the Claim, and took that entitlement into account in calculating the price it was prepared to offer for the Claim, did not mean that obtaining that benefit (or “taking advantage” of Article 12(1)) was one of BLM’s main purposes in acquiring the Claim.

Nor was the FTT satisfied that SCI had, as one of its main purposes, “taking advantage” of Article 12(1) by means of the assignment of the Claim. The FTT found this issue to be finely balanced because, by the time SIC's liquidators formally agreed to sell the Claim, they knew the end-purchaser was resident in the ROI and would therefore benefit from Article 12(1). However, in the view of the FTT, Article 12(5) could not have been intended to apply in such circumstances. Rather, for a person to be said to have a main purpose of “taking advantage” of a treaty relief in relation to a debt claim, something more was required than simply selling the debt claim outright for a market price that happened to reflect the fact that certain potential purchasers of the debt claim had tax attributes the seller did not have, to a purchaser that happened to be able to pay that market price because it had those tax attributes by virtue of being entitled to relief under a treaty. 


This is the first case in which the construction and application of a main purpose test in a double tax treaty has been considered. The decision provides a helpful indication of how the tax tribunals and courts may approach the interpretation of "main purpose" tests in treaty provisions in future cases, and the FTT's application of the obiter comments in Blackrock will be particularly welcomed by taxpayers. 

The decision can be viewed here.

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