LAWFUEL – Law News Network – The ECJ will deliver its judgment on Tuesday 12 September on the validity of the UK’s Controlled Foreign Companies’ (“CFC”) tax rules. These rules impose tax on a UK parent company which has set up a subsidiary in a jurisdiction with a lower rate of tax (less than 75 per cent of the UK rate).
Cadbury-Schweppes set up subsidiaries in Ireland which carried out finance transactions and took advantage of a beneficial (10 per cent) tax regime in Ireland for these activities.
The UK tax authorities tried to tax Cadbury-Schweppes on the activities of its Irish subsidiaries. The case was appealed to the UK courts which referred the issue to the ECJ to determine whether the UK’s CFC’s rules infringe the “right of establishment” in the EC Treaty.
In May, the Advocate-General gave an opinion (guidance to the ECJ) which said that the UK’s rules could only be justified if it applied only to “wholly artificial” arrangements. Advocate-General Léger said that Cadbury-Schweppes arrangements would not be artificial if it could show that its Irish subsidiaries were:
genuinely established in Ireland;
that the Irish subsidiaries performed services which were carried out in Ireland; and
those services were not “devoid of economic purpose” with regard to Cadbury-Schweppes activities.
He advised that the case should be sent back to the UK courts to decide whether the UK rules and Cadbury-Schweppes’ activities complied with these tests.
Why Will the ECJ’s Decision be important?
First, the UK CFC rules form an important plank in the UK tax authorities’ armoury to control UK-based multinationals’ activities and to force them to pay tax at the UK rate of 30 per cent. These rules have recently been the subject of considerable criticism that they make the UK an unattractive place to headquarter international operations.
Secondly, several other European countries (e.g. Germany, France and Spain) have similar CFC rules which will be affected by this decision.
Thirdly, a number of European States e.g. Ireland, Luxembourg and some eastern European countries have low rates of tax and would benefit from the ECJ questioning the validity of CFC rules.
Finally, no one knows for sure the amount of tax at stake if the UK’s rules are struck down, but it could involve several hundred of millions or even billions of pounds.
Notes to Editors
Linklaters is a law firm that specialises in advising the world’s leading companies, financial institutions and governments on their most challenging transactions and assignments. With offices in major business and financial centres, we deliver an outstanding service to our clients anywhere in the world.
Guy Brannan is the head Linklaters’ global tax practice. His main areas of practice include M&A, contentious tax issues, investigations, litigation and negotiation, EU tax law and international tax planning. Other tax partners to speak on this issue include: Mark Kingstone and Mike Hardwick.
Linklaters was named European Tax Firm of the Year, European Tax Litigation Firm of the Year (for the second year running), French Tax Firm of the Year and German Tax Firm of the Year at the recent International Tax Review 2006 awards.