ECJ opinion adds to confusion on foreign profits tax

The European Court of Justice (ECJ) has plunged the tax world into confusion after an opinion yesterday (2 May) on the way companies are taxed on profits made in foreign jurisdictions.

In 2004 the Inland Revenue referred a claim brought by Cadbury Schweppes to the ECJ, asking for guidance on UK legislation on ‘controlled foreign companies’, or CFCs.

Cadburys claimed that it should not have to pay UK tax on the profits made by the Irish subsidiaries, under European freedom of movement laws.

ECJ Advocate General Philippe Léger handed down his opinion on the case yesterday. He found that companies were not abusing the principle of freedom of establishment by setting up foreign subsidiaries to take advantage of favourable tax regimes.

He added that UK legislation was disadvantageous to parent companies. However, he also said the High Court must decide whether or not UK law is compatible with European legislation.

Cadburys must now wait for the judgment of the ECJ for a final decision in the case. Normally the ECJ will agree with the Advocate General’s opinion.

Cadbury’s in-house tax team instructed Pump Court Tax Chambers’ Julian Ghosh for the ECJ hearing.