ECJ u-turn on support for state tax law hailed by firms

Advisers this week hailed a new u-turn by the European Court of Justice as
the court’s advocate general gave strong support for companies aggrieved by the
UK’s controlled foreign companies’ (CFC) legislation.

A host of companies ­ including Anglo-American, Prudential and Vodafone ­
have challenged the UK’s CFC rules, which are designed to prevent tax avoidance
by stopping companies shipping profits offshore to low-tax jurisdictions.

Advocate general Leger said on Tuesday in the case of Cadbury Schweppes that,
while the UK rules were not incompatible with EU law, they should only apply to
‘wholly artificial arrangements intended to circumvent national law’.

The strong defence of companies’ rights to structure themselves as they wish,
whether for tax reasons or otherwise, unless an arrangement is wholly
artificial, has heartened experts.

Chris Morgan, head of the EU tax group at KPMG, said a reference in the
opinion to the M&S case was particularly positive. It suggested that the M
&S case only worked in respect of its facts, implying another u-turn by the
courts, this time in favour of corporates seeking large repayments.

Grant Thornton’s international tax partner Anton Hume described the verdict
as a victory for common sense and speculated that the UK would now have to amend

its legislation to avoid contravening EU law.

‘Today’s opinion could be good news for Cadbury Schweppes and also for other
UK taxpayers. Hundreds of millions of pounds of tax could be at stake,’ he said.

A group litigation order testing the CFC rules, as well as the Vodafone case,
is waiting the Cadbury Schweppes result. There remains some dispute as to the
artificiality of the confectionary group’s tax structure which may have to be
resolved in the UK courts.

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