Cadbury Schweppes has won a partial victory in the European Court of Justice (ECJ) this morning (12 September) over UK legislation on the tax payable by foreign subsidiaries.

The ECJ handed down a decision finding that the UK’s laws governing corporation tax on ‘controlled foreign companies’ (CFCs) constitutes a restriction on freedom of establishment under European law.

Cadbury can therefore rely on European Community law for its subsidiaries established in Ireland, which were set up to raise finance for the group as a whole. Cadburys is also able to take advantage of favourable Irish tax regimes.

However the ECJ also found that if a company sets up a foreign subsidiary solely for the purpose of evading UK corporation tax, and does not intend to carry on “genuine economic activities” then the UK legislation can apply.

The case will now return to the Special Commissioners in the UK, who will decide if a “motive test” can be applied to determine whether a company is carrying out artificial activities.

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

The case’s outcome will affects claimants in the CFC Dividend Group Litigation in the High Court, which is being led by Dorsey & Whitney.