Court affirms need for unsatisfied tax claim to use tax gathering defence


It is trite law that the Hong Kong courts will not enforce a foreign arbitral award if it amounts to indirect enforcement of foreign laws.(1) In the particular context of tax law, a defence known as the ‘tax gathering’ defence exists, under which a foreign award will not be enforced if it would, in effect, help foreign states to collect taxes.

However, the requirements of this defence have been unclear. There is case law that supports the argument that an unsatisfied tax claim of the state (ie, outstanding taxes owed to the state) is an essential feature,(2) but some of these authorities have been questioned.

The Hong Kong courts finally settled this issue in Organising Committee of the XXIII Olympic Winter Games v XI Paralympic Winter Games and Pico Projects ((2021) HKCFI 606), which affirmed and applied the principle of Re Reid for the first time – namely, that an unsatisfied tax claim is indeed a prerequisite for the tax gathering defence.


The plaintiff entered into various contracts with the defendant in order to rent structures, which were silent as to the obligation to pay profits tax to Russia. It transpired that, under Russian law, the plaintiff should have withheld 20% of the contract price and paid the same to Russia (Articles 24, 44, 45, 287 and 310 of the Russian Tax Code). However, the plaintiff failed to withhold the relevant profits tax. Nonetheless, the plaintiff paid the relevant amount to the Russian budget and sought to recover the amount from the defendant. Litigation proceeded, which ultimately led to the plaintiff’s success in the Russian Court of Cassation (the Russian judgment). In essence, the court held that the defendant was obliged to return the profits tax on the basis of unjust enrichment.

It was against this background that the proceedings to enforce the arbitral award were conducted in Hong Kong. The issue was whether the defendant was entitled to use the tax gathering defence such that the Russian judgment would not be enforced.


It was common ground that no Hong Kong precedent applied to this case. Therefore, it was necessary to turn to foreign case law.

The plaintiff placed heavy reliance on Re Reid, a case decided by the British Columbia Court of Appeal, the facts of which are similar to the present case. In that case, an English trustee of an estate of the executrix was accountable to Her Majesty’s Revenue and Customs for estate duty. The estate had insufficient assets in England and therefore the trustee paid the shortfall out of its own pocket. A remainderman under the will challenged the trustee’s entitlement to recover the shortfall of the taxes from the estate since foreign revenue law could not be directly enforced in British Columbia. The court rejected the remainderman’s argument since “whether or not the respondent trustees indemnified cannot affect the slightest degree the amount of estate duty collected in England”. Similarly, it was held in Williams and Humbert and Wahr-Hansen that an existing unsatisfied tax claim with the state is essential to the tax gathering defence.

In the present case, the defendant relied on Stringham v Dubois ((1993) 3 WWR 273), which did not follow Re Reid. The court opined that the mere fact that there was such a satisfied claim did not defeat the defence of indirect enforcement of foreign law. The defendant’s argument was rejected because:

• Williams and Humbert was not considered in Stringham;

• the statement was merely obiter; and

• Stringham gave no detailed analysis with regard to Re Reid – there was only a one-sentence reference.

The defendant also referenced the editor’s note in the International Law Reports to argue that Wahr-Hansen had been wrongly decided. The argument was also rejected since the editor merely criticised the application of the law in Wahr-Hansen, rather than the law stated therein.

In light of the above, the court affirmed that an outstanding tax claim is a requirement of the tax gathering defence. As shown in the Russian judgment, the plaintiff had already paid the taxes to the Russian budget. Therefore, the defendant could not avail the tax gathering defence and the Russian judgment was enforced in the plaintiff’s favour.


As rightly recognised by the court, the boundaries of indirect enforcement are obscure. Parties must be careful to distinguish the substance from the form of a claim. The Hong Kong courts have conveniently set out the requirements needed for the tax gathering defence as originated from the principle against indirect enforcement. This is beneficial for promoting legal certainty.

However, there was another issue which was raised but not decided in this case namely, whether the plaintiff should be considered an agent of the Russian budget (to collect taxes from the defendant) or an agent of the defendant (to pay taxes to the Russian budget for the defendant). The significance is that if the plaintiff is an agent of the Russian budget, it is arguably recovering taxes on behalf of the Russian budget. It follows that the ultimate recipient of the judgment debt would be the Russian budget and that enforcement of the judgment would amount to indirect enforcement of Russian tax law. Support can be drawn from case law(3) to argue that it amounts to indirect enforcement where a liquidator is appointed to recover tax. This could be a potential ground of appeal.

For further information on this topic please contact William Leung or Alicia So at William KW Leung & Co by telephone (+852 2810 6199) or email ( The William KW Leung & Co website can be accessed at


(1) Dicey, Morris & Collins, The Conflict of Laws, Rule 3.

(2) Re Reid (1970) 17 DLR (3d) 199 BCCA; Williams and Humbert v W&H Trade Marks (Jersey) Limited [1986] AC 368; and Wahr-Hansen v Compass Trust Co Ltd 10 ITLR


(3) Peter Buchanan Ltd and Macharg v McVey [1955] AC 516 and QRS 1 APS v Fransden [1999] STC 616.

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