ECJ judgement on CFC case will change tax rules

The UK will have to overhaul its taxation of controlled foreign companies
after the European Court of Justice today said that current legislation could
only apply to wholly artificial tax arrangements.

Following the opinion of Advocate-General Léger, the ECJ said that that
setting up a CFC to take advantage of a favourable tax regime was not abusive of
UK tax laws, as long as the CFC operated from genuine offices and employed
genuine staff.

Referring to the Cadbury Schweppes case, the ECJ that setting up Cadbury
Schweppes Treasury Services (CSTS) and Cadbury Schweppes Treasury International
(CSTI) in Ireland did ‘not in itself constitute abuse’ and did not prevent
Cadbury Schweppes from relaying on Community law, which protected its right to
freedom of establishment.

‘The CFC legislation therefore constitutes a restriction on freedom of
establishment within the meaning of community law,’ the ECJ said in its
judgment.

It will now be left to the UK special commissioners to decide whether or not
a company taking advantage of a low tax regime in another country had legitimate
staff and operations in that country.

Guy Brannan, head of Linklater’s global tax practice, said the judgment was a
‘big blow’ for the UK, as a number of CFCs did have sufficient substance to meet
the requirements set out by the ECJ.

Read the full judgement at
http://curia.europa.eu/en/actu/communiques/index.htm