The European Court of Justice heard arguments on this case on 13 December last.

The legitimacy of Controlled Foreign Companies legislation, which is operated in several territories to counter tax arbitrage arising from multinationals operating subsidiaries in low corporation tax jurisdictions, was challenged at the European Court of Justice this week. The eventual outcome of the case is hugely significant for Ireland, and ICAI is following the case very closely.

By way of background, Cadbury Schweppes is incorporated and resident in the UK. It has two subsidiaries resident and established in Ireland whose business is to raise and provide finance to the group. These subsidiaries benefit from the IFSC regime for group treasury companies and at the time in question were entitled to the 10% corporation tax rate. The companies were not taxed in the UK.

UK legislation on CFCs enables the UK Revenue to charge the profits of a subsidiary in the hands of the parent company where the control subsidiary is resident outside the United Kingdom and is subject to a lower level of taxation. This UK legislation is, however, subject to a number of exceptions.

Taxation under the legislation on CFCs is also excluded where the establishment and operation of the control subsidiary satisfies a motive test:

• i.e. the company must show the reduction of tax resulting in the case of this subsidiary was not the main purpose or one of the main purposes of the transactions and
• the taxpayer must show that it was not the main reason or one of the main reasons for the CFCs existence to achieve a reduction in UK tax by diversion of profits from the UK.

There are no indications yet as to when a judgment might be forthcoming.