LAWFUEL – Law News Network – On Tuesday 12 December the European C…

LAWFUEL – Law News Network – On Tuesday 12 December the European Court of Justice will deliver a decision on whether the UK’s system of taxing dividends paid by foreign subsidiaries to UK parent companies is incompatible with the EC Treaty.

The case, called the FII Group Litigation case, concerns the basic question of discrimination. The UK tax system provides that UK to UK dividends between companies are tax exempt. By contrast, where a UK company receives dividends from a foreign company (e.g. a German or French subsidiary) the dividends are taxable, although the UK gives relief for tax paid in the foreign jurisdiction.

In April 2006, Advocate General Geelhoed, ruled against the UK and stated that this differential treatment of dividends contravened the right of establishment in the EC Treaty.

Guy Brannan, global head of tax at Linklaters, said:

“If the ECJ follows the Advocate General’s opinion, it will be a major blow to the UK. It comes after the Cadbury-Schweppes ruling in the autumn which called into question the validity of the UK’s Controlled Foreign Companies regime. These cases have prompted a review the UK tax authorities of their international corporate tax rules and a consultation will follow in 2007.

“The amount of tax at stake is unclear, but will clearly be substantial. However, the UK authorities are clearly concerned because in the Pre-Budget Report earlier this week, Chancellor of the Exchequer Gordon Brown tightened up the rules on limitation periods for tax claims.”

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