Multinationals on tenterhooks over ‘CFC’ verdict

A ruling on the taxation of controlled foreign companies from the European
Court of Justice could bring about a complete overhaul of the way multinational
companies are taxed by the Treasury.

Tomorrow the
ECJ will rule
on the Cadbury
case, which challenges the way the UK government taxes profits
generated in countries with low tax rates.

Anti-avoidance rules allow the
Treasury to tax
profits generated in these regions, but these rules were challenged by Cadbury

The opinion from the Advocate General, which is usually followed by the ECJ,
went in favour of business. The opinion argued that the avoidance rules could
only be applied to wholly artificial arrangements.

If the ECJ follows this opinion, the case will be referred back to the UK
courts, where it is likely it will be decided what counts as an artificial

The Treasury is in the process of consulting on changes to UK corporation tax
rules should the ECJ damage the UK system irreparably. Advisers believe that the
UK could clamp down on tax relief on interest to make up shortfalls, as well as
drop the taxation of dividends.

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