Vodafone will have to wait and see
whether its £2bn controlled foreign company tax dispute with the revenue will be
shut down after the special commissioners said that key questions about the
economic substance of the Vodafone’s Luxembourg subsidiary still needed to be
Vodafone, which has been locked in a £2bn battle with the taxman over the
subsidiary, will now have to appear at a second hearing before the commissioners
where it will be decided whether the company is conducting genuine economic
The commissioners had been asked to decide whether or not to refer the case,
known as Vodafone 2, to the European Court of Justice.
Vodafone 2 follows a similar CFC case led by Cadbury Schweppes, which went
before the ECJ last year.
ECJ said that Cadbury Schweppes should be exempt from the UK’s CFC
rules as long as it could show that subsidiaries based in low-tax regions were
conducting economic activity of genuine substance.
In the Vodafone 2 case it was left to the special commissioners to decide
whether UK domestic rules could be interpreted in such a way as to include the
substance test specified by the ECJ, as the UK rules could have been seen as too
formulaic to incorporate the ECJ opinion.
The commissioner panel, John Walters QC and Theodore Wallace, were divided
over whether local rules could be interpreted in this way. Wallace said that
they could not and that Vodafone 2 should be referred back to ECJ because of
But panel chair Walters said a referral to the ECJ was not necessary, which
means that Vodafone will now only have to prove the economic substance of its
Luxembourg arm and will not have to go through Europe first.
Chris Morgan, KPMG’s head of international tax, said the judgment was small
victory for Vodafone.
‘Ideally Vodafone would have liked the special commissioners to deal with the
question of substance in addition to the legal question, but it can take some
encouragement from the fact that the legal matter will not have to go all the
way through Europe,’ Morgan said.
Read the full judgment
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