The General Court released its decision in the UK’s and ITV’s appeals against the Commission’s decision that the UK’s CFC finance company exemption constituted state aid in so far as it applied to profits attributed to UK activities (Cases T‑363/19 and T‑456/19, reported at page 4). Spoiler alert, the appeals were dismissed.
It is a 43 page judgment which will no doubt be dissected in much detail over the coming days and weeks. But for now, I just want to pick up on one point, which is the apparent death of the Cadbury Schweppes (Case C-196/04) principles. Almost for closure, given that, from a purely UK tax perspective freedom of establishment is of more academic interest, post-Brexit.
Readers will recall that in Cadbury Schweppes the CJEU:
found that CFC rules could be a justified restriction on the freedom of establishment ‘on the ground of prevention of wholly artificial arrangements’ but only if they were proportionate to that objective, meaning that they must only apply to wholly artificial arrangements; and
held that in order to determine whether an arrangement were wholly artificial it would be necessary to ascertain by reference to objective factors, in particular ‘the extent to which the CFC physically exists in terms of premises, staff and equipment’, whether the CFC is ‘a fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State’.
And in Vodafone 2 [2009] EWCA Civ 446, the Court of Appeal held the effect of this was that an additional exception could be read into the UK’s CFC rules at the time as a matter of confirming interpretation for a CFC which was actually established in another member state of the EEA and carried on genuine economic activities there.
One of the arguments run by the UK and ITV was that the Commission had made an error in refusing to find that the finance company exemption was justified as an attempt to comply with freedom of establishment, and the Cadbury Schweppes judgment in particular.
However, the General Court held, at para 197 of its judgment, that:
‘It should be borne in mind that the United Kingdom tax system is based on the principle of territoriality and that, according to that principle, the profits made by CFCs are not taxed in that State. However, where those profits are in fact profits attributable to an entity resident in the United Kingdom which was responsible for the funds or significant people functions carried out in connection with the loans which generated those profits, they are regarded as having been artificially diverted and, therefore, as being taxable in the United Kingdom, through a CFC charge. Thus described, that system cannot be regarded as constituting an obstacle to freedom of establishment.’ (my emphasis).
That, to me, seems like quite a leap from Cadbury Schweppes. There is no test there of whether the CFC is a ‘fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State’ or whether the arrangement is ‘wholly artificial’ by reference to any other criteria.
It rather seems to be saying look, if you, the UK, have drafted a set of rules that effectively determine the circumstances in which you consider profits to have been artificially diverted from the UK, that is now good enough for us. We will accept that taxing those profits does not constitute a restriction on freedom of establishment. The fact that your rules treat the profits as ‘artificially diverted’ is sufficient.
Although, it is also not all that surprising that the General Court would have no difficulty quickly finding that CFC rules aimed at tackling perceived profit diversion were not inconsistent with one of the fundamental EU freedoms given the requirement under the EU Anti-Tax Avoidance Directive (ATAD) for all member states to adopt CFC rules to do just that!
Home >Articles > EU CFC state aid decision: the death of Cadbury Schweppes?
EU CFC state aid decision: the death of Cadbury Schweppes?
The General Court released its decision in the UK’s and ITV’s appeals against the Commission’s decision that the UK’s CFC finance company exemption constituted state aid in so far as it applied to profits attributed to UK activities (Cases T‑363/19 and T‑456/19, reported at page 4). Spoiler alert, the appeals were dismissed.
It is a 43 page judgment which will no doubt be dissected in much detail over the coming days and weeks. But for now, I just want to pick up on one point, which is the apparent death of the Cadbury Schweppes (Case C-196/04) principles. Almost for closure, given that, from a purely UK tax perspective freedom of establishment is of more academic interest, post-Brexit.
Readers will recall that in Cadbury Schweppes the CJEU:
found that CFC rules could be a justified restriction on the freedom of establishment ‘on the ground of prevention of wholly artificial arrangements’ but only if they were proportionate to that objective, meaning that they must only apply to wholly artificial arrangements; and
held that in order to determine whether an arrangement were wholly artificial it would be necessary to ascertain by reference to objective factors, in particular ‘the extent to which the CFC physically exists in terms of premises, staff and equipment’, whether the CFC is ‘a fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State’.
And in Vodafone 2 [2009] EWCA Civ 446, the Court of Appeal held the effect of this was that an additional exception could be read into the UK’s CFC rules at the time as a matter of confirming interpretation for a CFC which was actually established in another member state of the EEA and carried on genuine economic activities there.
One of the arguments run by the UK and ITV was that the Commission had made an error in refusing to find that the finance company exemption was justified as an attempt to comply with freedom of establishment, and the Cadbury Schweppes judgment in particular.
However, the General Court held, at para 197 of its judgment, that:
‘It should be borne in mind that the United Kingdom tax system is based on the principle of territoriality and that, according to that principle, the profits made by CFCs are not taxed in that State. However, where those profits are in fact profits attributable to an entity resident in the United Kingdom which was responsible for the funds or significant people functions carried out in connection with the loans which generated those profits, they are regarded as having been artificially diverted and, therefore, as being taxable in the United Kingdom, through a CFC charge. Thus described, that system cannot be regarded as constituting an obstacle to freedom of establishment.’ (my emphasis).
That, to me, seems like quite a leap from Cadbury Schweppes. There is no test there of whether the CFC is a ‘fictitious establishment not carrying out any genuine economic activity in the territory of the host Member State’ or whether the arrangement is ‘wholly artificial’ by reference to any other criteria.
It rather seems to be saying look, if you, the UK, have drafted a set of rules that effectively determine the circumstances in which you consider profits to have been artificially diverted from the UK, that is now good enough for us. We will accept that taxing those profits does not constitute a restriction on freedom of establishment. The fact that your rules treat the profits as ‘artificially diverted’ is sufficient.
Although, it is also not all that surprising that the General Court would have no difficulty quickly finding that CFC rules aimed at tackling perceived profit diversion were not inconsistent with one of the fundamental EU freedoms given the requirement under the EU Anti-Tax Avoidance Directive (ATAD) for all member states to adopt CFC rules to do just that!
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