On 12 September 2006, the European Court of Justice (ECJ) released its judgment on the Cadbury Schweppes case (C-196/04). The ECJ found that the UK Controlled Foreign Company (CFC) rules, which apply when a foreign subsidiary of a UK parent is subject to tax at a remarkably lower level than the corresponding UK tax, violate the EC treaty. Such rules may be justified only in wholly artificial arrangements.

Background

Cadbury Schweppes plc (CS UK) had set up two Irish subsidiaries to carry out intra-group lending and treasury activities. These subsidiaries were subject to a 10% tax rate under the International Financial Services Centre (IFSC) regime in Dublin. The UK tax authorities apportioned the profits of one Irish subsidiary to CS UK. CS UK appealed before the UK court which then asked for a preliminary ruling by the ECJ.

Judgment by the ECJ

The highlights of the judgment - which is even more beneficial to the taxpayer than the opinion of the Advocate General issued this May  (cp. link to breakingTAXnews 25-06) - are as follows:

• the UK CFC regime leads to an infringement of the EU freedom of establishment;
• such a regime may however be justified in cases of wholly artificial arrangements intended to escape the national tax normally payable;
• if it can be proven that, despite the existence of tax motives, the subsidiary is actually established in the other Member State and carries on genuine economic activities there, then the CFC rules should not apply. Objective criteria to this respect include the subsidiary's degree of physical presence (premises, staff, equipment) in its country of establishment. 

CCH-PwC

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