Interpreting the CFC rules

The taxpayer company (Vodafone) which was UK resident and part of a worldwide group owned a subsidiary VIL which was incorporated and resident in Luxembourg.

Applying the controlled foreign companies legislation (TA 1988 ss 747 and 748) HMRC sought to tax interest earned by VIL on loans which it had made to German subsidiaries as if it were income of the taxpayer company.

The company claimed that the legislation was incompatible with EU law.

The case went to the Special Commissioners who referred to the European Court of Justice but this was withdrawn after the ECJ’s decision in Cadbury Schweppes plc v CIR (Case C-196/04) [2006] STC 1908.

In that decision the ECJ said that the controlled foreign companies legislation introduced a restriction on freedom of establishment which could be justified on the basis that it enabled the UK to prevent tax...