UK and International Tax news
EC Requests UK To Amend CFC Rules
Monday 6th June 2011
The EC has formally requested the UK to amend its legislation to comply more fully with the rulings of the ECJ on the tax treatment of controlled foreign corporations (CFCs).
Despite the 2006 ECJ ruling in the Cadbury Schweppes case, the EC considers that the UK is still not complying with EU law on freedom of establishment and free movement of capital. In particular, the UK continues to tax the profits of subsidiaries established in the EU or EEA. Under EU law, profits of CFCs, which are subsidiaries of companies established in EU Member States or in EEA countries, should not be subject to additional taxation in the country of the parent company if the subsidiaries are engaged in genuine economic activities.
Despite the corrective measures taken by the UK since 2006, the EC considers that the UK is still not fulfilling its obligations under Arts 49 and 63 (freedom of establishment and free movement of capital) of the Treaty on the Functioning of the EU and Arts 31 and 40 of the EEA Agreement. Indeed, the EC is of the view that the UK provisions may lead, in certain cases, to an additional taxation of profits made by subsidiaries engaged in genuine economic activities in other EU Member States or EEA countries.
The EC’s request takes the form of a reasoned opinion, being the second step of EU infringement proceedings, which considers that the measures put in place by the UK are not a sufficient response to the ECJ decisions in Cadbury Schweppes [case C-196-04] and Test Claimants in the CFC and Dividend GLO [case C-201-05].
In the EC’s view, the UK’s legislative response to the above rulings does not eliminate the discriminatory restriction of the anti-abuse CFC regime. The new provisions allow a UK taxpayer to reduce the taxable basis of a UK-owned CFC under certain restrictive conditions. However, they fail to exclude from the CFC regime all subsidiaries established in EU/EEA Member States which are not purely artificial and are not involved in profit-shifting transactions.
The EC sent a formal notice to the UK on 22 March 2010. The UK replied on 15 July 2010. In the absence of a satisfactory response within two months, the EC may refer the UK to the ECJ.
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