Controlled Foreign Companies rules

Two more referrals concerning UK CFC legislation are made to the European Court of Justice.

Controlled Foreign Companies (CFC) rules throughout Europe may be susceptible to challenge under EC Treaty provisions prohibiting restrictions on a company’s freedom of establishment. While the interaction of CFC rules with tax treaties has been the subject of litigation both in France and in the UK, the compatibility of such provisions with European law is only now heading for the European Court of Justice.

The UK Special Commissioners in the case of Cadbury Schweppes PLC and Cadbury Schweppes Overseas Limited v CIR [2004], SpC 415, in June 2004 referred to the ECJ the question of whether or not UK CFC rules as applied to EU subsidiaries (in this case Irish IFSC companies) are compatible with the EC Treaty. Whether or not the taxpayer succeeds remains to be seen since the Special Commissioners noted that there were a number of uncertainties to resolve. The oral hearing in this case will take place on 13 December 2005.

Two other UK cases have recently been referred to the ECJ. These are the cases of Test Claimants in the CFC and Dividend Group Litigation v CIR, C-201/05, and Vodafone 2 v HMRC, C-203/05. The first case involves the CFC group litigants and covers much of the ground ploughed by the Cadbury Schweppes case. The Vodafone 2 case is primarily concerned with the cost of proving an entitlement to an exemption from the CFC rules.

While Ireland does not have CFC rules, Irish companies can be subject to overseas CFC rules due to the 12.5% rate of corporation tax. For this reason, any decision on the application of CFC rules to companies resident in EU Member States will be of great significance in Ireland. A number of similar challenges are already being lined up in other jurisdictions, some of which relate to the application of CFC rules to non-EU Member States.