Expert Insights

Expert Insights

Danish tax authority loses "cum-ex" case: revenue rule reigns supreme

The recent decision in Skatteforvaltningen v Solo Capital Partners LLP (in special liquidation) and others [2021] EWHC 974 (Comm) is a significant blow to the Danish Tax Authority (Skatteforvaltningen, or SKAT) in its well-publicised litigation in the High Court relating to the “cum-ex” scandal. The judgment itself touches on delicate legal considerations around sovereignty and jurisdiction in international tax-related enforcement proceedings, focussing on two points of law both arising from the ‘revenue rule’.

The Cum-Ex Affair

The “cum-ex” scandal has shaken a number of jurisdictions in Western Europe since it was first publicised in 2012. Le Monde termed it “the heist of the century”. It has led to well-publicised arrests of lawyers and bankers in several jurisdictions and a number of high-profile corporate settlements. The present High Court proceedings relate to the activities of Mr Sanjay Shah who established the London-based firm Solo Capital Partners LLP. He is accused of defrauding the Danish state, between 2012 and 2015, to the tune of almost one percent of its GDP. The press has been filled with lurid details of his yachts, multinational property portfolio, and estimated personal wealth of $700m. For his part, Mr Shah has argued his actions were perfectly legal.

In summary, "cum-ex" was a tax arbitrage scheme targeting national legal provisions which permitted foreign shareholders to reclaim income tax withheld on dividend payments. In essence, cum-ex permitted withholding tax to be “reclaimed” multiple times as the same shares were transferred rapidly between a group of investors with (cum) and without (ex) dividend rights around the time of distribution. National revenue authorities throughout Europe argue that this was wholly artificial and extremely aggressive but it has also been alleged that they had been aware of the scheme for several decades before any measures were taken to counteract it.

The sums of money involved are truly breathtaking. Estimated losses to national exchequers are estimated at over €30bn in Germany, at least €17bn for France, €4.5bn in Italy, €1.7bn in Denmark, and over €200m for Belgium. The international nature of cum-ex, however, has meant that certain proceedings to reclaim these funds face delicate jurisdictional difficulties.  These form the basis for the recent decision on several preliminary questions of law in the massive action brought by SKAT against 114 defendants in the United Kingdom, including Mr Shah and Solo Capital Partners LLP, for fraudulent and negligent misrepresentation as well as claims for unjust enrichment and knowing receipt. SKAT also argued that the contracts were sham transactions and therefore void.

Dicey Rule Three

The first issue before Andrew Barker J in the High Court concerned the so-called “revenue rule” which exists in most jurisdictions and has been accepted in English law since the 18th century. Dicey, Morris & Collins on the Conflict of Laws (15th edn) provide an authoritative statement of this as ‘Dicey Rule 3’:

‘English 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

(2) founded upon an act of state.’

The purpose behind this prohibition on ‘sovereign claims’ was explained by Lord Keith of Avonholm as a response to the incompatibility of ‘an assertion of sovereign authority by one State within the territory of another’ in the leading case of Government of India v Taylor [1955] AC 491. It means that a court cannot entertain, for example, a claim issued by a foreign state for unpaid taxes. As it focuses on the nature of the claim rather than its merits, it will often lead to results in practice which seem unfair or even perverse to many observers. Nonetheless, Andrew Barker J emphasised that the reciprocal nature of the rule acts as an incentive for states to pursue a recourse in public international law through treaties or conventions permitting mutual enforcement.  The main examples of these are bilateral double tax treaties, the OECD Convention on Mutual Assistance in Tax Matters and, within the EU, the Mutual Assistance on Recovery Directive, or MARD.

As Lord Keith also acknowledged in Government of India, there is a distinction between the ‘sovereign claim’ and a so-called ‘patrimonial claim’ brought by a foreign state. The latter refers to a foreign state’s ability to bring a claim based on ordinary private law principles which is not connected with the enforcement of a sovereign right. This means that it is permissible, for example, to bring a claim against a person who has stolen money held in a government account. However, the distinction between the indirect enforcement and patrimonial claims which formed the core of the arguments in SKAT’s claims is not always obvious and necessitates a detailed consideration of the substance, rather than form, of the claims.

According to SKAT, the cum-ex scheme had misled the Danish state into paying “refunds” of unpaid withholding tax. It argued that it was making a patrimonial claim because the issue was not unpaid tax but a wrongly refunded tax payment. Rejecting these arguments, Andrew Barker J noted that the refund mechanism formed an essential part of the withholding tax regime and equated to a dispute over the nature and validity of the refund claims. Although indirect, he concluded that it was indeed an attempt, albeit indirectly, to enforce Danish revenue law. It was therefore blocked by Dicey Rule 3. He explicitly distinguished the wrongful refunds from, for example, ‘theft or robbery of cash from a SKAT vault’ or a ‘cyber-attack’ in which sovereign authority would have been immaterial and SKAT’s claims would have been patrimonial in nature.

Brussels-Lugano Regime

In anticipation of this outcome, SKAT had also raised arguments around the jurisdiction regime established in the Recast Brussels Regulations and the Lugano Convention. These are rules which govern the mutual recognition and enforcement of judgments in ‘civil and commercial matters’ but do not apply to ‘revenue, customs, or administrative matters’. SKAT argued that, if its claims were indeed ‘civil or commercial matters’, the prohibition under Dicey Rule 3 must be set aside since to do so would otherwise ‘derogate from and impair the effectiveness of the Brussels-Lugano regime’.

Andrew Barker J rejected this argument. He agreed that the claims were indeed ‘civil or commercial’ rather than ‘revenue’ in nature for the purposes of the regime because SKAT’s status as the national revenue authority had not changed ‘the rules of the litigation game’ such that it was no longer acting substantively as a private litigant. However, he concluded that Dicey Rule 3 was ‘an overriding rule of English law’ and was not ousted or disapplied by reliance on the Brussels-Lugano regime. As such, there was still an absolute barrier to proceeding with the claims.


The effect of the judgment is that SKAT is unable to pursue its claims for recovery in the UK. Given the sheer size of the claims, it is almost certain that the decision will be appealed – in fact, we understand permission to appeal has already been granted in relation to the Brussels-Lugano arguments; it remains to be seen whether permission will be granted on the revenue rule issue. The judgment is, however, a reminder of the potential difficulties which may exist to cross-border tax enforcement in spite of the increased political attention which this issue is now receiving internationally.

Our thinking

Share this Page