Vodafone faces tough tax call

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Vodafone victory may be challenged

The taxman is expected to try to smoke
out in its £2bn row over the controlled foreign companies rules, moving the
court battle on to a question of what exactly happened in the company’s
Luxembourg subsidiary.

The mobile giant won in the High Court last week, but the case, the largest
on CFCs ever, is expected to go all the way to the House of Lords given its
significance and value.

The government’s controlled foreign company rules prevent corporates from
channelling UK profits through overseas subsidiaries.

But companies say this is inconsistent with EU free market rules. In the
Cadbury Schweppes case the European Court of Justice established that such rules
are valid where they are designed to prevent artificial structures.

Vodafone claims that since the UK’s rules do not meet those criteria, the
rules do not stand.

But it is thought HM Revenue & Customs will seek to argue in the Court of
Appeal that Vodafone should show why its subsidiary is not artificial. If it is
artificial, then it cannot argue that its rights under European law have been

Vodafone bought German mobile giant Mannesmann through the Luxembourg
company, meaning no capital gains will accrue on the increase in the value of
the shares.

Vodafone would be forced to prove that the subsidiary is controlled from
Luxembourg and that it serves a genuine economic purpose, a point it has so far
declined to argue in court.

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