Offshore billions could return

Companies will today be advised about whether they can bring tens of billions
of pounds stored offshore into the UK free of tax, as part of a European Court
of Justice case that could have a dramatic impact on capital flows into the UK
and on companies’ investment plans.

The advocate general at the ECJ will give his opinion on the case today,
which concerns franked investment income.

FII rules enable dividends paid by subsidiaries to groups to attract a tax
credit that reduces the overall tax paid on the transfers.

The case has several parts, but if the FII rules are extended fully to EU
subsidiaries, tens of billions of pounds stored offshore by multi-national
companies could be repatriated free of tax, according to Chris Morgan, head of
the European tax group at KPMG.

The move could have a similar effect to the current US amnesty, which has
allowed companies a low tax holiday to bring back hundreds of billions of

The case more narrowly relates to companies with foreign subsidiaries in the
EU, which suffered higher tax rates as a result of preferential treatment being
offered to UK subsidiaries for such dividends.

The government has itself disclosed in pleading that the case
may be worth 7bn euros (£4.9bn) in terms of the maximum hit on the Treasury. The
values involved make it one of the biggest UK cases the ECJ has dealt with.

Peter Cussons, an EU direct tax expert at
PricewaterhouseCoopers, said a full extension of the FII rules could have a
dramatic impact. The court would have to say the UK’s rules were
‘disproportionate’, he said.

Advocate general Leendeert Geelhoed raised companies’ expectations when he
gave an opinion last month on a similar case. He suggested that ‘equivalent
treatment’ should be offered by UK tax authorities to dividends distributed from
abroad or from within the UK.

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