EC tells UK to amend CFC legislation

THE UK's controlled foreign companies (CFC) legislation must be amended to comply with European Union law, the European Commission announced today.

The EC criticised the UK in a statement for not complying with EU law on freedom of establishment and free movement of capital. The UK has continued to tax companies on profits made through the genuine economic activities of subsidiaries in the EU and member states of the European Economic Area. The EC has said that the 2006 Cadbury Schweppes ruling made this illegal.

The statement read: "Despite the corrective measures taken by the UK, the Commission considers that the UK is still not fulfilling its obligations under Articles 49 and 63 (freedom of establishment and free movement of capital) of the Treaty on the Functioning of the EU."

Gary Richards, tax partner at Berwin Leighton Paisner, warned that this could reduce the UK's corporate tax take and encourage companies to move their headquarters abroad.

He said: "Today's challenge by the European Commission to the UK's current CFC legislation could give HMRC a real headache. It is yet another move that will instil uncertainty in the UK's CFC rules.

"On balance, this challenge by the EC is helpful for business if it means that the new rules will comply with European law. However, if HMRC chooses to wait for the outcome of the challenge, rather than adjusting their current proposals, the continuing uncertainty over CFC rules will deter investors just at a time when the end seemed in sight."

UK taxpayers could face even more challenges from HMRC in other areas to "fill the gap" if the new rules raise less tax from companies choosing to settle abroad, he added.