Tuesday, July 12, 2005

CFC’s in Europe under attack - New ECJ cases in the pipeline

In a recent posting I discussed about CFC Legislation and EC Law: Lessons from Sweden and UK. In that post, I mentioned a Swedish ruling from April 2005 issued by the Swedish Council for Advance Tax Rulings and made a parallel with the Cadbury Schweppes Case (Case C-196/04) referred to the European Court of Justice (ECJ) by the UK Special Commissioners on April 2004. Now, two more cases dealing with CFC legislation have reached the ECJ. The first case (Case C-201/05) is a UK Group Litigation Order (1), referred to as the “CFC and EU Dividend Group Litigation”. This class action concerns claims, which seek to challenge the UK CFC and EU dividend provisions and to assert that these provisions were or are in breach of the EC Treaty (2) and/or the non-discrimination article of various Double Taxation Conventions and/or the European Convention on Human Rights. The second case (Case C-203/05) referred by the Special Commissioners concerns the proceedings between Vodafone and the UK tax authorities. Basically, in this case Vodafone 2 (a subsidiary of Vodafone PLC), is responding to an enquiry by the UK Inland Revenue with regard to the UK tax treatment of its Luxembourg holding company, Vodafone Investments Luxembourg SARL (LuxHold) under the UK’s CFC Regime.

The CFC Regime serves to subject a UK resident company to corporation tax in the UK in respect of the profits of a controlled foreign company in certain circumstances. Vodafone 2’s argues that it is not liable to corporation tax in the UK under the CFC Regime in respect of its LuxHold Company on the basis that the CFC Regime is contrary to EU law. In summary, it is argued that imposition of corporation tax under the CFC Regime amounts to unlawful discrimination or an unlawful restriction on the exercise of fundamental freedoms under the EU Treaty (particularly Articles 43 and 56). On 3 May 2005 the Special Commissioners referred the matter to the ECJ requesting that a number of questions in relation to the invalidity argument be determined as a preliminary matter. I should add that Vodafone has taken provisions, amounting to £1,757 million, for the potential UK corporation tax liability and related interest expense that may arise if the Company is not successful in its challenge of the CFC Regime. It is not expected that the ECJ will deliver a judgment in this matter until, at the earliest, mid 2006.

(1) Group Litigation Orders (GLO) resemble class action suits and involve a process where "test claimants" are chosen from the body of claimants to determine the main issues of the case. The "group" is made up of claimants with similar claims, and within the groups there are "classes" which further separate the individual fact patterns into easily manageable sub-groups. In the UK, Dorsey’s tax litigation group has been the main Law firm handling GLO claiming tax refunds from the UK Inland Revenue on the basis of EC Law.

(2)The vast majority of EU claims rely on one or more of the EC Treaty fundamental freedoms: the free movement of goods (Articles 28-31 EC), the free movement of persons, including the freedom of establishment (Articles 43-48 EC), freedom to provide services (Articles 49-55 EC) and the free movement of capital and payments (Articles 56-60 EC). It should be noted that, the first three of these freedoms focus solely on movements within the EU. However, Article 56 explicitly states that it relates to movements of capital and payments both within the EU and in an EU/third-country context.


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