Court of Appeal dismisses HMRC's appeal in Burlington Loan Management decision on Treaty purpose tests

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The Court of Appeal ("CoA") has dismissed HMRC's appeal in HMRC v Burlington Loan Management DAC [2026] EWCA Civ 461, delivering a significant judgment on the interpretation of principal purpose tests in the context of double tax treaties ("DTTs").

The CoA held that an Irish tax-resident investment company had, in buying a debt claim from a Cayman tax-resident entity, not "taken advantage" of the relevant provisions of the UK-Ireland DTT, and therefore was entitled to a withholding tax ("WHT") refund from HMRC in respect of interest it received on that purchased debt claim.

Key points:

The decision provides some comfort that DTT relief should generally be available for treaty resident taxpayers who price transactions on the assumption that DTT relief will be available, in the case of arm's length commercial transactions between unconnected parties. Anti-abuse provisions in DTTs should generally only be engaged if the taxpayer intends to benefit from relief under the treaty in a way that is contrary to the object and purpose of the treaty.
"Taking advantage of" a DTT provision requires "more" than simply "obtaining the benefit" of that provision. To hold otherwise would be self-defeating: a DTT that denied its own benefits to those it was designed to protect would undermine the very purpose for which it was negotiated. The question of what "more" is required to trigger anti-abuse rules remains unclear.
"Taking advantage of" means obtaining the benefit of a treaty article in a manner that is contrary to the object and purpose of the DTT. The treaty exists to encourage the movement of capital between the UK and Ireland by eliminating double taxation, so an Irish-resident company acquiring a UK-source debt claim at arm's length and expecting to be taxed only in Ireland was doing precisely what the treaty intended.
Genuine commercial transactions can still be exempted from the relief. "Artificiality" is not required for the "taking advantage" test and so genuine commercial transactions without any artificiality may in principle be caught (albeit that questions of whether there are artificial aspects to a transaction and whether there is a genuine commercial rationale apart from obtaining a tax benefit will remain "highly relevant"). It is not yet clear from this case what types of genuine commercial transactions might be caught, other than references made to connected party transactions and conduit companies.
The decision offers broader commentary on how principal purpose tests ("PPTs") in international treaties should be read and interpreted. The CoA flagged the importance of applying an international lens when considering interpretation of internationally negotiated treaties, using OECD materials and international precedent (i.e. not UK-only interpretations) to form conclusions. The CoA's reasoning in Burlington will be relevant to the interpretation of purpose tests across international tax treaties, including those incorporating the OECD's Multilateral Instrument ("MLI") PPT.

The full judgment can be found here: The Commissioners for HMRC v Burlington Loan Management DAC [2026] EWCA Civ 461

How Did We Get Here?

Burlington Loan Management DAC ("BLM") was an Irish tax-resident investment company engaged in the business of acquiring and managing distressed debt. In the years following the 2008 financial crisis, BLM purchased, in the secondary market, several claims against the administrators of Lehman Brothers International (Europe) ("LBIE") (part of Lehman Brothers). One of the claims bought was the SAAD Claim, which was purchased from SAAD Investments Company Ltd (a Cayman Islands tax-resident entity) ("SICL"), via a broker.

It is important to note the timeline of events: at the point commercial terms were agreed for the assignment of the SAAD Claim, SICL did not know the identity of the purchaser, with pricing negotiations taking place through the broker. BLM was aware at the time that the interest payments on the SAAD Claim would, absent treaty relief, have been subject to UK WHT at the standard rate. This, alongside quantum, profit margins, timing, and risk associated with the expected cash flows, was factored into BLM's pricing decisions.

Following the assignment of the SAAD Claim, BLM claimed a refund of UK WHT on the interest payments under Article 12(1) of the UK-Ireland DTT from HMRC, which allocates sole taxing rights over interest to the state of residence of the beneficial owner - in this case, Ireland.

The UK-Ireland Double Tax Treaty

The relevant provisions of Article 12 (prior to the implementation of the MLI) were as follows:

Article 12(1): Interest derived and beneficially owned by a resident of a Contracting State shall be taxable only in that State.

…

Article 12(5): The provisions of this Article shall not apply if it was the main purpose or one of the main purposes of any person concerned with the creation or assignment of the debt-claim in respect of which the interest is paid to take advantage of this Article by means of that creation or assignment.

HMRC refused to refund BLM in relation to the SAAD Claim, relying on Article 12(5) of the Treaty, which disapplies Article 12(1) where the "main purpose or one of the main purposes" of any person concerned with the creation or assignment of the debt-claim was "to take advantage of" Article 12.

The case progressed through the FTT and UT, with the lower courts finding in favour of the taxpayer. HMRC appealed to the CoA on the basis that both tribunals had applied the wrong legal test in reaching their conclusion.

The Court of Appeal Decision

Questions considered

The main questions considered by the CoA were as follows:

What is the meaning of "to take advantage of" in Article 12(5)? In particular, does it require some element of abuse or artificiality, as BLM contended, or does it mean simply "to obtain the benefit of" the article, as HMRC argued?
What is the object and purpose of the UK-Ireland DTT?
Did BLM have a purpose of "taking advantage of" Article 12? This required the court to consider:

o What was BLM's actual purpose in acquiring the SAAD Claim?

o Was that purpose contrary to the object and purpose of the Treaty?

The CoA dismissed HMRC's appeal in its entirety. In doing so, it provided the following answers to the questions identified above.

1. The meaning of "to take advantage of"

The CoA firmly rejected HMRC's submission that "to take advantage of" simply means "to obtain the benefit of" Article 12. To adopt HMRC's interpretation would mean that the treaty was self-defeating: a provision that denied treaty benefits to all those who sought to obtain them would render the treaty meaningless.

Instead, the CoA held that "to take advantage of" means obtaining the benefit of the article in a manner that is contrary to the object and purpose of the treaty – that is, in a manner amounting to abuse.

This approach is consistent with the decision of the CoA in Vietjet Aviation JSC v FW Aviation (Holdings) Limited [2025], a recent non-tax case. One of the relevant points in that case was whether a particular entity would benefit from a DTT with Japan, in which the WHT provisions were materially identical to the UK-Ireland Treaty. Here too, the CoA held that a purpose test in a DTT context should be read with reference to the treaty's underlying object and purpose, rather than as being immediately triggered on the obtaining of benefits.

Whilst this clarification does offer a positive starting point for businesses looking at their WHT position, it is not entirely clear what "more" would be required, beyond "obtaining the benefit" for a transaction to be caught by Article 12(5). However, the judgment does suggest that the provision might be more likely to be engaged where:

the transaction involves connected parties, such that the assignment of the debt-claim appears designed to shift the beneficial ownership of interest into a more favourable treaty jurisdiction without genuine commercial justification; or
the purchaser is a newly established special purpose vehicle set up specifically for the purpose of acquiring the debt and claiming treaty relief - a classic conduit arrangement.

These observations reinforce the fundamental distinction between "treaty shopping" (which Article 12(5) is designed to prevent) and the straightforward obtaining of treaty benefits by a taxpayer who falls squarely within the terms of the relevant provision and is entitled to benefit. Notwithstanding this distinction, the CoA declined to accept BLM's submission that Article 12(5) can only be engaged where there is some element of artificiality in the transaction. A genuine commercial transaction can therefore, in principle, be caught by a purpose test. However, the CoA did confirm that questions of whether there are artificial aspects to a transaction and whether there is a genuine commercial rationale apart from obtaining a tax benefit will remain "highly relevant".

2. The object and purpose of the Treaty

Following a review of various OECD materials, the CoA held that:

"…the principal purpose of the Treaty is to promote cross-border commerce by eliminating double taxation".

Article 12(1) gives effect to this by allocating sole taxing rights over interest to the state of residence of the beneficial owner.

The CoA also expressly rejected HMRC's submission that BLM's acquisition of the SAAD Claim and the subsequent request for a WHT refund contravened the purpose of the Treaty by "sharing of profit" at HMRC's expense. As the CoA put it:

"It is no part of the object and purpose of Article 12 to maximise tax revenues for HMRC, and Article 12(5) does not prohibit assignments simply on the basis that they have the consequence that less tax will be recoverable by HMRC than if the assignment had not taken place."

The relevant question is whether the Treaty has been abused, not whether HMRC has collected less tax than it might otherwise have done.

3. Did BLM have a purpose of "taking advantage" of Article 12?

Applying the correct legal test, the CoA held that the "main purpose or one of the main purposes" of BLM acquiring the SAAD Claim was not to "take advantage of" Article 12 within the meaning of Article 12(5). BLM's purpose in acquiring the SAAD Claim was the generation of profits from a distressed debt investment – evidence for this could be seen in the documentation associated with pricing decisions and the historical business of BLM within this industry. This purpose was entirely consistent with, and indeed furthered, the Treaty's objective of encouraging the movement of capital between the two contracting states.

"It must follow… that without more, it cannot be an abuse for a taxpayer who is resident in in one of the contracting states to acquire a debt-claim in the expectation that he will enjoy the very benefit of exemption from tax which the treaty expressly provides that someone in his position should have." [97]

The CoA rejected HMRC’s central contention that the analysis should start from the position prior to the assignment, where interest would have been subject to UK withholding tax. Instead, the correct starting point for analysing Article 12(1) was that the UK had agreed that BLM, as a resident of Ireland and the beneficial owner of the SAAD Claim, should only be taxed on the interest payable in Ireland. BLM's reliance on Article 12(1) in this instance was entirely in accord with the objects and purpose of the UK-Ireland DTT.

Of importance to the decision in Burlington seems to have been the fact that BLM was an independent entity that had been conducting its own business acquiring similar debt claims for some time, BLM acted at arm's length with SICL and there was no element of artificiality or collusion between the parties in the fixing of the price. As such, the CoA determined that BLM should be entitled to obtain the benefit of Article 12(1) on the acquisition of the SAAD Claim, and HMRC's appeal was dismissed.

It remains to be seen whether HMRC may look to appeal to the UK Supreme Court. Given the quantum of the tax at stake, such an appeal may be possible, albeit that it is difficult to see what avenues would be open to HMRC given the definitiveness of the CoA decision.

Additional points of note

The Judgment also provides guidance on important principles for the interpretation of a DTT.

1. "Main purpose or one of the main purposes"

While the parties had agreed that the domestic UK case law principles should apply in determining whether obtaining treaty relief was a "main purpose or one of the main purposes" of the transaction, both Snowden LJ and Falk LJ expressed reservations about this approach in obiter remarks.

Their shared view appeared to be that, given that a DTT is the product of a cross-border negotiation between sovereign governments rather than a purely domestic instrument, it should not be interpreted exclusively by reference to domestic precedents. Instead, for consistency across the DTT network, an international lens should be applied, favouring an interpretation:

"unconstrained by technical rules of English law, or by English legal precedent, but [based instead] on broad principles of general acceptation".

This is a significant signal of direction for future cases.

2. Can a profit motivation main purpose displace all other purposes?

The CoA noted, without resolving, a tension in the domestic UK case law on purpose tests between the decisions in Fisher v HMRC [2021] EWCA Civ 1438, [2022] 1 WLR 651 and IRC v Kleinwort Benson [1969] 2 Ch 221 – in particular, the question of whether having a sole purpose of making a profit can displace all other purposes for the sake of a "main purpose" analysis.

Relying on the principle first derived from Mallalieu v Drummond [1983] 2 AC 861 – that some results or consequences are "so inevitably and inextricably involved" in an activity that, unless they are incidental, they must be the purpose for it – HMRC had sought to argue that BLM's main purpose must have been to obtain the benefit of Article 12(5) of the UK-Ireland DTT. HMRC's view was that the ultimate result of most commercial, and most tax motivated, transactions was to make a profit or avoid a loss, and so it cannot be correct that having such a purpose should displace any other purpose when considering the application of Article 12(5). BLM disagreed, arguing that the FTT and UT were entitled to find as they did, as a finding of fact. The court left this point open, as it was not necessary to decide it on the facts. However, it is a question with potentially wider implications for the application of UK domestic purpose rules, and one to watch in future litigation.

Falk LJ's obiter remarks do provide some idea of the likely direction of travel, highlighting the importance of the "legislative context": "

"Where the tax advantage in question is specifically conferred by legislation then it cannot have been intended that it should inevitably be denied by a "main purpose" rule if it forms part of the economics of a transaction."

Applying this logic to Burlington, Falk LJ made the point that Article 12(5) had to be interpreted in the wider context of Article 12, which confers on Irish resident taxpayers a potentially valuable benefit in the form of an exemption from UK withholding tax on interest. If HMRC's interpretation was right, then it would be "very hard to see how that relief could be relied on in any case where the exemption is of more than incidental economic significance.” Furthermore, such an interpretation would make the treaty self-defeating.

Key Takeaways

1. Application to modern principal purpose tests (PPTs)

The facts of Burlington pre-date the UK's implementation of the OECD MLI. Article 12(5) of the UK-Ireland DTT has now been replaced with the PPT in Article 7 (Prevention of Treaty Abuse) of the MLI, which is now also present in the majority of the UK's DTTs:

"(1) Notwithstanding any provisions of a Covered Tax Agreement, a benefit under the Covered Tax Agreement shall not be granted in respect of an item of income or capital if it is reasonable to conclude, having regard to all relevant facts and circumstances, that obtaining that benefit was one of the principal purposes of any arrangement or transaction that resulted directly or indirectly in that benefit, unless it is established that granting that benefit in these circumstances would be in accordance with the object and purpose of the relevant provisions of the Covered Tax Agreement."

Notably, the "taking advantage of" wording, which the Burlington case focusses much of its attention of, is not present in the new PPT. This raises the question as to what extent Burlington can be applied to the new style wording found in most of the UK's DTTs. In our view, the Burlington decision does still provide some helpful guidance on how the courts are likely to interpret such PPTs.

Key principles include:

"Object and purpose" of the treaty: The discussion in Burlington on the "object and purpose" of the treaty, and whether BLM's purpose was contrary to the object and purpose of the treaty, remains relevant, given the similarities to the wording of the PPT. The CoA's judgment serves as a useful reminder that the fundamental purpose of a DTT is to promote cross-border commerce by eliminating double taxation, not to protect domestic tax revenues. HMRC cannot invoke a purpose test simply because a transaction results in less UK tax being collected than would otherwise have been the case. The question is always whether the treaty has been abused, assessed against its own objectives.
Any international treaty should be construed in a manner which is "international, not exclusively English", favouring "an interpretation which reflects the ordinary meaning of the words used and the object of the treaty."
Importance of OECD materials, including the Commentary on the Model Tax Convention, are a legitimate and important aid to interpretation.

2. Debt assignment transactions at risk of being caught by PPTs?

In Burlington, the acquirer was an independent entity that had been conducting its own business acquiring similar debt claims for some time, acted at arm's length with the seller and there was no element of artificiality or collusion between the parties in the fixing of the price. In this context, the CoA decision does not come as any surprise. However, what remains less clear is what "more" is required for a PPT to be engaged to prevent a taxpayer obtaining the benefit of an applicable treaty. The clearest indications from the judgment are that connected party transactions and conduit structures carry heightened risk. Beyond that, the position remains fact-sensitive.

Businesses and their advisers should be alert to the following when assessing the availability of treaty relief in the context of debt assignments:

Lower Risk	Higher Risk
Arm's length acquisition of debt in secondary market between unconnected parties	Assignment between connected parties
Acquirer has an established, genuine business in treaty jurisdiction	Newly incorporated SPV in treaty jurisdiction with no broader business, set up solely to acquire debts
Commercial rationale independent of any treaty benefit	Treaty benefit is the dominant or sole driver of structure
Absence of any artificial or contrived steps	Insertion of additional steps which are artificial, or which serve no genuine commercial purpose or function
Substance in relevant jurisdiction pre-dates transaction	Substance established contemporaneously with (or after) transaction

3. Record-keeping and documentation

Once again, the CoA's decision - which reiterates the significance of the FTT's findings of fact - underlines the critical importance of contemporaneous documentation. The timeline of events, including when information was made available to BLM, the historical nature of BLM's business, and the process by which assets were priced and acquired (and the documentation evidencing any related decisions), were all central to the FTT's conclusion that BLM's purpose was commercial rather than tax-driven. For businesses that have a genuine commercial purpose in entering a transaction, it is important to be able to evidence that purpose.

Businesses seeking to rely on DTTs should ensure that:

Investment decisions are clearly documented as being driven by commercial assessment of the asset rather than the availability of treaty relief in isolation.
Pricing analyses are retained, including records of any tax assumptions built into pricing models and the relative weight attributed to them.
The decision-making process is transparent and traceable, so that the substance of any "purpose" argument can be demonstrated, rather than merely asserted.

It is also worth noting that appellate courts are reluctant to depart from findings of fact made by the FTT and so the factual position taken in the first instance will often be final.

4. Alternative exemptions from UK withholding tax

It is also worth noting that there are other routes to obtain exemption from UK WHT on interest that may offer greater certainty in some cases, including:

The Quoted Eurobond Exemption, where the relevant debt is listed on a recognised stock exchange.
The Qualifying Private Placement ("QPP") regime, for private placements that meet the relevant conditions.

These alternatives should be considered as part of any structuring exercise, particularly where treaty relief may be subject to challenge. Under the Quoted Eurobond Exemption in particular, the identity of the owner of the debt has no relevance to the exemption from UK withholding tax, which can provide much greater certainty on the UK withholding tax position.

How Can We Help?

Our tax team has extensive experience advising on all aspects of UK withholding taxes, the structuring of cross-border transactions, and the application of double tax treaties, including in the context of distressed debt, loan portfolio acquisitions, and cross-border financing arrangements.

If you would like to discuss the implications of the Burlington decision for your business or for any specific transaction, please do not hesitate to get in touch with a member of the team.

For a discussion on the current administrative complications when claiming relief under a UK double tax treaty, listen to our podcast: Pause for thought: withholding tax on UK interest & claiming treaty relief | Travers Smith

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