The High Court in Skatteforvaltningen v Solo Capital Partners LLP & Ors [2021] EWHC 974 (Comm) (“Solo Capital“) has dismissed claims brought by the Danish national tax authority (the Skatteforvaltningen or “SKAT”) for the recovery of Danish dividend tax refunds that were paid following alleged misrepresentations.  The claims were dismissed on the basis of the common law rule that an English court will not enforce a foreign public, revenue, or penal law.  This was so notwithstanding that many of the claims fell under the Brussels Regulation (recast) or the Lugano Convention (“Brussels” and “Lugano” respectively).

Unless the decision is reversed, it must cast some doubt on the ability of other foreign tax authorities to pursue claims in the High Court in relation to other alleged cum/ex frauds and similar.

The Revenue Rule

The rule that an English court will not enforce a foreign public, revenue, or penal law is often termed “Dicey Rule 3” in private international law parlance.  It is said to be justified on grounds that (a) it is inconsistent with a state’s own sovereignty for it to effectuate another state’s assertion of authority within the former’s territory, and (b) it would be embarrassing for a state to determine whether such an act ought to be recognised.

Previous cases had established that:

  • Rule 3 would be engaged even where a claim involved the “indirect” enforcement of a foreign revenue law; and
  • a claim based on a private law cause of action but which involved the enforcement of a foreign tax liability as a matter of substance over form could still trigger the rule.

However, it was unclear from these authorities whether their reasoning could extend to a case in which the claim was not for the direct or indirect enforcement of an outstanding tax liability, but the recovery of a tax refund mistakenly paid by a tax authority.

Solo Capital now establishes that this can be the case, depending on the facts.

Key facts

The essential facts in Solo Capital were as follows.

Under the Danish Withholding Tax Act (“WHTA”), a company declaring dividends is required to withhold a 27% dividend tax (“WHT”) on behalf of its shareholders and to pay it to SKAT.

An exemption existed for non-Danish shareholders under s.69B WHTA, which provision gave effect to the position agreed by Denmark in double taxation treaties.  Where that exemption applied, an eligible shareholder was entitled to claim a WHT refund, and SKAT was statutorily obligated to pay it.  Typically, that shareholder would claim the refund by submitting a paper form accompanied by supporting documents to SKAT evidencing its eligibility, and SKAT would approve or reject it.  According to SKAT, these claims were processed amidst “a strong culture in Denmark of presuming the taxpayer’s honesty in its dealings with SKAT“.

SKAT alleged that, between August 2012 to July 2015, various shareholders submitted numerous fraudulent WHT refund claims, which induced it erroneously to pay out approximately DKK12.5 billion (c. £1.5 billion).  These sums ultimately reached the defendants, some of whom (it was alleged) were complicit in the alleged wrongdoing.

SKAT brought various tortious, unjust enrichment, and equitable claims in the English High Court against 114 named entities, most of whom were domiciled in the United Kingdom.  By these claims, SKAT sought the recovery of the WHT refunds it had paid as damages or personal and/or proprietary restitution.

Decision of the High Court

The High Court (Andrew Baker J) dismissed SKAT’s claims on the basis that they involved the enforcement of a revenue law, and that Dicey Rule 3 was therefore applicable.

In reaching that conclusion, Andrew Baker J reasoned that SKAT’s claims, whilst framed as private law claims, were still based on SKAT’s “entitlement” to collect and retain WHT under the WHTA (at [94]-[99]), albeit an entitlement that was “conditional” upon the requirements for a WHT refund not being satisfied in a given case (at [97]).  In other words, although SKAT was seeking the recovery of a WHT refund and not a WHT debt owed, its claims were:

  • still aimed at “vindicat[ing]” SKAT’s rights under Danish law to collect WHT from taxpayers; and
  • conceptually and functionally” the same as a claim for tax due and unpaid (at [97]).

On the related issue of whether the claims fell within the Brussels or Lugano regimes, the High Court found that they did but that this did not preclude the claims from being dismissed.  Andrew Baker J observed that the Court of Appeal’s decision in QRS v Frandsen [1999] WLR 2169 was no longer good law (since it was inconsistent with the CJEU’s decision in Case C-49/12 Sunico v HMRC [2014] 1 QB 391).  He explained that the correct legal position after Sunico was that an action brought by a public body would be a “civil and commercial matter” as long as (1) it involved a private law claim and (2) did not involve the public body using its powers and/or status to change “the rules of the litigation game” in the relevant proceedings .  On the facts, although SKAT had exercised its powers as a tax authority to obtain evidence, that had no effect on the substantive or procedural rules applicable to the determination of its claims.  Therefore, SKAT’s claims were “civil and commercial matters” falling within Brussels or Lugano, but Dicey Rule 3 still applied to require an English court to dismiss them.


The High Court’s reasoning is noteworthy for two reasons.

Substance over form in determining whether a claim is enforcing foreign revenue law

First, the Court gave further guidance on determining whether a private law claim involves the enforcement of a revenue law as a matter of substance over form.  Specifically, one has to “examine and identify the central interest served by the pursuit of the claim” and to discern whether that is “a sovereign (governmental) interest rather than a patrimonial (private law) interest“.  Towards that end, the court indicated that it may be “important” to consider the “mechanism of harm” or “alleged wrongdoing” involved, “at the level of the factual detail of the particular case“.

However, as the Court’s disposition of the case would suggest, the “mechanism of harm [or wrongdoing]” involved is not always determinative.  It may be a less important factor in certain situations.

Thus, as Solo Capital itself demonstrates, even where the “mechanism of harm” was a mistaken transfer of money allegedly induced by the original WHT applicants’ deception and aided by a defendant’s complicit involvement in the same (which, it might be thought, points to it being essentially a matter of private rights and remedies), it seems that a cause of action founded on such acts would still involve the enforcement of a foreign tax law if the defendant’s liability for the sum claimed was ultimately dependent on the existence of the claimant’s right to collect and retain tax.  By contrast, in a case where the defendant’s liability does not depend on whether the claimant really had the right to exact tax, such as where a tax authority mistakenly pays the refund to the wrong party and seeks to recover it, it might be that the “central interest” being pursued is less likely to be identified as the authority’s right to tax (as the claim is not dependent on its right to tax in any way).  In either scenario, it would appear that scrutinising the “mechanism of harm” is unlikely to be of much help.

Compatibility with the Brussels and Lugano regimes

Second, in reaching the conclusion that Rule 3 could still apply to claims governed under Brussels or Lugano, the Court made several observations about the nature and operation of that rule.  In summary, Andrew Baker J posited that:

  1. Simon Brown LJ’s obiter observations in Frandsen that it was impermissible for an English court to dismiss claims falling within Brussels or Lugano pursuant to Rule 3 were incorrect;
  2. Rule 3 was compatible with the Brussels and Lugano regimes because it was not a rule of jurisdiction but a mandatory “substantive” rule of the lex fori (which operated in the choice of law “realm” rather than the jurisdictional); and
  3. it was not open to the High Court to restrict the scope of Rule 3 (as some commentators had advocated) as it was a “fundamental rule of English law“.

A detailed discussion of these observations is beyond the scope of this blogpost.  Suffice to say, the judge’s observations are likely to be controversial.  This is so not least because it is arguable that applying Rule 3 in a case where an English court has been allocated jurisdiction over a claim under the Brussels or Lugano regimes, with the practical result that the English court must turn the claimant away, could potentially infringe the principle of effectiveness in EU law (cf. Case C-159/02 Turner v Grovit [2004] ECR I-3565, [29]).

Michael Hunt
Michael Hunt
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Myron Phua
Myron Phua
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