TaxSource Total

Here you can access and search summaries of relevant Irish, UK and international case law written by Chartered Accountants Ireland

The case summaries are displayed per year, per month and by case title with links to the case source

Vodafone 2 v HM Revenue & Customs [2009] EWCA Civ 446

CFC

Introduction

This case deals with the application of the Cadbury Schweppes ECJ decision in relation to Vodafone.

The Facts

In March 2000 Vodafone Group plc acquired Mannesmann AG through its wholly owned subsidiary Vodafone 2 Ltd (“V2”), a company incorporated and resident in England. A company incorporated and resident in Luxembourg, Vodafone Investments Luxembourg SARL (“VIL”), was interposed between V2 and Mannesmann as the wholly owned subsidiary of the V2 to hold the shares in the Mannesmann and other European telecommunication companies. In the accounting period ended 31st March 2001, VIL derived substantial income from its various assets.

In November 2002 HMRC gave notice to V2 of its intention to enquire into its tax return for that accounting period and sought further information designed to entitle it to assess V2 to tax in the United Kingdom on the income of VIL, giving credit for the tax paid by VIL in Luxembourg. The statutory basis for such an assessment was contained in the Controlled Foreign Companies (“CFC”) legislation.

The same issue had arisen between Cadbury Schweppes plc and HMRC. In that case, the Special Commissioners had referred various questions to the ECJ. The ECJ judgment was given on 12 September 2006. Following the Cadbury Schweppes ECJ decision, the issue in the Vodafone case with which the Special Commissioners were then concerned was whether the CFC Legislation could be interpreted in a manner which did not unlawfully restrict V2's freedom of establishment, as declared by the ECJ in Cadbury Schweppes. One of them thought that it could; the other of them concluded that it could not. As the former was in the chair he was entitled to a second or casting vote and his view prevailed.

V2 appealed that decision to the High Court. The High Court held that it was not possible to interpret the CFC Legislation so as to conform to the freedom of establishment of V2 as declared by the ECJ in Cadbury Schweppes. In those circumstances he “disapplied the CFC Legislation as contrary to Community Law”. Revenue appealed to the Court of Appeal.

The Issue

There were two issues:

  1. Was it possible to interpret the CFC Legislation so as not unlawfully to restrict V2's freedom of establishment? And if not
  2. To what extent (and in what manner) should it be ‘disapplied’?

The Decision

The Court of Appeal found in favour of the Revenue.

Firstly the decision by the ECJ in the Cadbury Schweppes case was discussed.

Cadbury Schweppes Overseas Ltd was a wholly owned subsidiary of Cadbury Schweppes plc and the holding company of Cadbury Schweppes Treasury Services Ltd and Cadbury Schweppes Treasury Services International Ltd. Those subsidiaries had been incorporated and were resident in Ireland. HMRC sought to apportion the chargeable profits of the two Irish subsidiaries to their parent company using the UK CFC rules and to charge the parent with corporation tax, giving credit for the lower rate of tax payable in Ireland.

The ECJ considered whether there had been an abuse of the freedoms by the UK CFC rules. It held that legislation such as the CFC Legislation was precluded as a restriction on freedom of establishment. However that restriction was justified on the ground of prevention of abusive practices, the specific objective of such a restriction must be to prevent conduct involving the creation of wholly artificial arrangements which do not reflect economic reality.

After that, the application of the ECJ decision was determined.

The conforming interpretation the Court of Appeal accepted dealt with the element of the CFC Legislation which provided the hindrance or restriction on freedom of establishment as opposed to the elements of justification for that hindrance or restriction on which the interpretation put before the High Court concentrated. Hence it was possible to interpret the CFC Legislation so as not unlawfully to restrict V2's freedom of establishment. So, the first issue was answered in the affirmative.

On this basis, it was not necessary for the Court to reach a conclusion on the issue of disapplication.

The judgment is available online at http://www.bailii.org/ew/cases/EWCA/Civ/2009/446.html.