Sanjay Shah vs SKAT: A cum-ex legal battle explainer
28 April 2021 UK
Image: JohnKwan/adobe.stock.com
The Danish tax agency 鈥� Skattestyrelsen (SKAT) 鈥� this week suffered a major defeat in its long-running campaign to recoup tax revenue from the founder of UK hedge fund Solo Capital, Sanjay Shah.
The High Court of Justice, which governs England and Wales, dismissed the Danish case that Shah defrauded the tax authority of 鈧�1.9 billion between 2012 to July 2015, which it has been pursuing since 2018. Shah has always denied any wrongdoing.
Interestingly, SKAT claims at least 90 per cent of this tax loss occurred after March 2014.
Justice Andrew Baker dismissed the entirety of the case against all defendants on the basis that the Danish state was not entitled to enforce its own tax laws in an English court.
It means that the main trial against Solo Capital Partners and 91 other defendants, which was due to start in January 2023 and last an entire calendar year, will no longer go ahead.
The ruling
At the preliminary trial heard in March 2021, SKAT named 114 defendants, which included some overlap as some defendants are party to more than one claim, and was made up of various financial institutions and individuals.
The trial focused on the application of 鈥楧icey Rule 3鈥� also known as the 鈥楻evenue Rule鈥� which states: 鈥淓nglish 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 founded upon an act of state鈥�.
All parties agreed that Dicey Rule 3, at a high level, was 鈥渁 substantive rule of English law leading to the dismissal of claims falling within it, on the grounds that the court will not entertain them because they involve an attempt to have the court enforce extra-territorially the exercise of sovereign authority鈥�.
SKAT argued that that the claim was a 鈥渃ivil and commercial matter鈥� not 鈥渁 revenue customs or administrative matter鈥�, so Dicey Rule 3 did not apply.
In his conclusion on the application of Dicey Rule 3, Justice Andrew Baker determined it does apply 鈥渘otwithstanding that in form SKAT does not assert tax law causes of action and that these are civil litigation proceedings subject to the ordinary rules of such proceedings, because Dicey Rule 3, as an overriding rule of English law as the lex fori, looks beyond such matters of form to examine the substance, in the sense of the central interest in bringing the claim of the sovereign authority by which or in whose interests the claim is brought.
鈥淏ut the fact that SKAT asserted, in point of form, only private law causes of action, not tax claims, in civil litigation proceedings that are subject to the ordinary rules of such proceedings, means the proceedings are a 'civil and commercial' matter, not a 'revenue [etc] matter' within Article 1(1) of the Brussels-Lugano regime.
鈥淭o the extent that SKAT relied on the Brussels-Lugano regime as the basis for this court having jurisdiction over the Brussels-Lugano defendants that have been sued, including it may be for serving proceedings out of the jurisdiction, in my judgment it was right to do so.
鈥淭he result is that by the application of Dicey Rule 3 in these proceedings, all of SKAT's claims fall to be dismissed.鈥�
Commenting on the case, Syed Rahman, partner at law firm Rahman Ravelli, which is involved in several different cum-ex cases, says: 鈥淭his is a judgment that can be expected to be a major blow to cum-ex investigations where UK traders may be involved.
鈥淚t highlights one of the dangers in cross-border cases in particular, when dealing with issues relating to artificial share transactions which enabled multiple improper claims for tax rebates to be made in Europe.
鈥淭his case will have a serious knock-on effect on any investigations into institutions and individuals who operated out of London and carried out dividend arbitrages schemes in European countries.
鈥淐um-ex trading relates to double taxation treaties in Europe,鈥� Rahman adds, 鈥渨hile England does not adopt the concept of withholding tax. An English court cannot reasonably be expected to be confronted in English law with multifaceted, complex and novel foreign legal issues.
鈥淕enerally when foreign law applies, the law must be pleaded and proved as a fact to the satisfaction of the judge by expert evidence or other means. In the absence of foreign law, the court will apply English law to such a case. Here, the court needed to assess whether foreign law should apply 鈥� and its ruling is hugely significant.鈥�
Justice Andrew Baker鈥檚 ruling can be .
The High Court of Justice, which governs England and Wales, dismissed the Danish case that Shah defrauded the tax authority of 鈧�1.9 billion between 2012 to July 2015, which it has been pursuing since 2018. Shah has always denied any wrongdoing.
Interestingly, SKAT claims at least 90 per cent of this tax loss occurred after March 2014.
Justice Andrew Baker dismissed the entirety of the case against all defendants on the basis that the Danish state was not entitled to enforce its own tax laws in an English court.
It means that the main trial against Solo Capital Partners and 91 other defendants, which was due to start in January 2023 and last an entire calendar year, will no longer go ahead.
The ruling
At the preliminary trial heard in March 2021, SKAT named 114 defendants, which included some overlap as some defendants are party to more than one claim, and was made up of various financial institutions and individuals.
The trial focused on the application of 鈥楧icey Rule 3鈥� also known as the 鈥楻evenue Rule鈥� which states: 鈥淓nglish 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 founded upon an act of state鈥�.
All parties agreed that Dicey Rule 3, at a high level, was 鈥渁 substantive rule of English law leading to the dismissal of claims falling within it, on the grounds that the court will not entertain them because they involve an attempt to have the court enforce extra-territorially the exercise of sovereign authority鈥�.
SKAT argued that that the claim was a 鈥渃ivil and commercial matter鈥� not 鈥渁 revenue customs or administrative matter鈥�, so Dicey Rule 3 did not apply.
In his conclusion on the application of Dicey Rule 3, Justice Andrew Baker determined it does apply 鈥渘otwithstanding that in form SKAT does not assert tax law causes of action and that these are civil litigation proceedings subject to the ordinary rules of such proceedings, because Dicey Rule 3, as an overriding rule of English law as the lex fori, looks beyond such matters of form to examine the substance, in the sense of the central interest in bringing the claim of the sovereign authority by which or in whose interests the claim is brought.
鈥淏ut the fact that SKAT asserted, in point of form, only private law causes of action, not tax claims, in civil litigation proceedings that are subject to the ordinary rules of such proceedings, means the proceedings are a 'civil and commercial' matter, not a 'revenue [etc] matter' within Article 1(1) of the Brussels-Lugano regime.
鈥淭o the extent that SKAT relied on the Brussels-Lugano regime as the basis for this court having jurisdiction over the Brussels-Lugano defendants that have been sued, including it may be for serving proceedings out of the jurisdiction, in my judgment it was right to do so.
鈥淭he result is that by the application of Dicey Rule 3 in these proceedings, all of SKAT's claims fall to be dismissed.鈥�
Commenting on the case, Syed Rahman, partner at law firm Rahman Ravelli, which is involved in several different cum-ex cases, says: 鈥淭his is a judgment that can be expected to be a major blow to cum-ex investigations where UK traders may be involved.
鈥淚t highlights one of the dangers in cross-border cases in particular, when dealing with issues relating to artificial share transactions which enabled multiple improper claims for tax rebates to be made in Europe.
鈥淭his case will have a serious knock-on effect on any investigations into institutions and individuals who operated out of London and carried out dividend arbitrages schemes in European countries.
鈥淐um-ex trading relates to double taxation treaties in Europe,鈥� Rahman adds, 鈥渨hile England does not adopt the concept of withholding tax. An English court cannot reasonably be expected to be confronted in English law with multifaceted, complex and novel foreign legal issues.
鈥淕enerally when foreign law applies, the law must be pleaded and proved as a fact to the satisfaction of the judge by expert evidence or other means. In the absence of foreign law, the court will apply English law to such a case. Here, the court needed to assess whether foreign law should apply 鈥� and its ruling is hugely significant.鈥�
Justice Andrew Baker鈥檚 ruling can be .
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