On 12 September, 2006, the European Court of Justice (ECJ) released its decision in Cadbury Schweppes v Commissioners of Inland Revenue. The case examined whether the UK’s controlled foreign companies (CFC) legislation – under which profits earned by a subsidiary company resident in a ‘lower tax’ jurisdiction can be attributed to the parent company resident in the UK (and thereby taxed in the UK) – is lawful as a matter of European Union (EU) law.
The ECJ held that the CFC legislation in the UK is contrary to EU law, with one caveat – the legislation need not be amended or abolished if the UK can prove that the CFC legislation can be interpreted as giving rise to a charge to UK tax in one circumstance only, for example, where ‘wholly artificial arrangements’ (WAA) that do not reflect economic reality and which are aimed at circumventing the application of the legislation have been created.
