In order to minimize German corporate tax payable by its German subsidiary ("GmbH"), the taxpayer "Plc"), which was a UK company, formed a silent partnership (stille gesellschaft) with GmbH, which entitled it to annually receive most of the profits of Gmbh. In order for Plc to receive a UK foreign tax credit for local trade tax payable by subsidiaries of GmbH, it was necessary to conclude either that (1) the silent partnership was fiscally transparent, so that GmbH as the silent partner was to be treated for UK corporation tax purposes as entitled to a share of the dividends paid by the GmbH subsidiaries to GmbH (all of which, in turn, were paid to Plc), or (2) that the share of the profits of the silent partnership paid to Plc could be treated as dividends paid by GmbH to Plc.
After finding against Plc on the first issue, Peter Gibson LJ found that an extended definition of "dividend" in the Article of the UK-German Treaty respecting withholding tax (which included a participation in a silent partnership) did not extend to the relevant Article of that Treaty according the UK foreign tax credit. In the absence of the extended definition applying, Plc's share of GmbH's profits under the silent partnership did not qualify as a dividend under the ordinary meaning of that term (p. 262):
The ordinary meaning of 'dividend' is that it is a payment of a part of the profits for a period in respect of a share in a company (Esso Petroleum Co Ltd v Ministry of Defence [1989] BTC 500 at p. 502; [1990] Ch 163 at p.165)....To treat Plc's entitlement to a share of the profits of GmbH under the silent partnership as a dividend, when that payment was unrelated to shares in GmbH and the partnership is not a company, would be inconsistent with the ordinary meaning of 'dividend'.