European ruling in Cadbury case sparks tax relief fears

Tax relief on interest faces further threats after the European Court of
Justice this week delivered a key ruling on the UK’s controlled foreign
companies rules (CFC).

The ECJ ruled in the Cadbury Schweppes case that the UK’s CFC set-up could be
contrary to European Union rules on freedom of establishment.

But there are growing fears that by damaging UK revenues, every victory for
companies in the courts makes limitations on other reliefs more likely.

Interest relief is a key target at present, with the Treasury privately
consulting on the issue.

Bill Dodwell, tax partner at Deloitte, said the ruling had ‘knocked out a big
part of the UK’s CFC tax rules’ and predicted that interest rate relief was up
for revision as a result.

‘If that does change it will be a major blow,’ he said.

In its ruling on the case brought by Cadbury Schweppes, the ECJ clearly
stated that establishing a CFC in a country with a low tax rate was not abusive
practice and should be permitted if the CFC was run as a genuine operation.

It will be left to the UK’s special commissioners to decide whether a CFC is
a genuine operation, but several businesses with CFCs in low-tax jurisdictions
are expected to meet the requirements easily. As a result, the case could end up
costing the Treasury hundreds of millions of pounds.

The Treasury said it was still studying the ECJ judgment to see if it would
have to change its CFC rules.

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