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EU law, CFCs and the code of practice for banks

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There is a good case that the government's proposed CFC rules are not fully compliant with EU law. The draft legislation lacks an exemption for companies which are actually established and conducting genuine economic activities in other EEA Member States. The ‘profits-based’ exemptions do not give adequate ‘entity-based’ exemptions as demanded by Cadbury-Schweppes. So long as Cadbury-Schweppes remains good law and the European Courts do not expressly accept the government's contentions as to the state of EU jurisprudence in this area taxpayers will continue to have a strong argument that a Vodafone 2-style exemption should be read into the new rules to exempt genuine economic activities conducted by CFCs actually established in other EEA Member States. Banks which take the position that the new legislation is not compatible with EU law would not fall foul of the Code since taking that position would breach neither...

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