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CFC rules following Cadbury Schweppes
Advocate General Phillipe L?ger (AG) delivered his opinion in the Cadbury Schweppes (CS) v CIR case relating to the UK Controlled Foreign Companies (CFC) legislation.
The case involved CS setting up two Irish subsidiaries in the favourable International Financial Services Centre ("IFSC") in Dublin to raise finance and to provide that finance to the worldwide group of CS. The IFSC regime applies a 10% tax rate and clearly falls within the definition of 'lower level of taxation' contained within the CFC legislation. HM Revenue & Customs (HMRC) sought to tax the Irish profits in the hands of the UK resident parent company. CS claimed that the CFC legislation constitutes discrimination and contravened the principle of freedom of establishment.
Ross Wilkinson, Director of Corporate Tax at Chiltern, said:
"The CFC regime is one of HMRC's most powerful weapons against the use of tax havens by multinational groups. Whilst the legislation is primarily aimed at multinationals, the rules have a very wide scope to catch many international structures where subsidiaries are resident in low taxed jurisdiction.
The AG's opinion certainly favors the taxpayer as he concluded that the establishment of a company in a more favourable tax regime does not itself constitute an abuse of freedom of establishment. Moreover, we can deduce from the opinion that structures involving CFC's can only be treated as tax avoidance where they represent wholly artificial arrangements targeted at circumventing national tax law. Provided a CFC has a genuine establishment, provides genuine services with competent staff and has a real economic value it would seem that the 'Motive Test' exclusion should be applied.
We would not expect a decision from the ECJ until 2007, but we now wait with baited breathe the Vodafone 2 decision that is currently being heard at the ECJ as that case also considers the application of the CFC legislation.
Following the significant BAT GLO opinion and now the CS opinion favoring the taxpayer we expect many companies to make back dated claims which could result in hundreds of millions of pounds being payable by HMRC. The AG's opinion only provides guidance to the ECJ and it is not in itself determinative, it is however rare that the ECJ to deviate from the AG's opinion. We think it is time for the champagne to go into the fridge; however, the cork must remain firmly in the bottle".