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Vodafone case decides CFC legislation unenforceable in respect of EU subsidiaries

On 4 July 2008 the High Court held that the UK “controlled foreign company” (“CFC”) rules found in sections 747 to 756 and schedules 24 to 26 of the Income and Corporation Taxes Act 1988 (“ICTA”) (“the CFC legislation”) were not compliant with the right to freedom of establishment under the EU treaties. The High Court held it was illegal for HMRC to have imposed UK rates of corporation tax on Vodafone’s wholly-owned, Luxembourg-resident subsidiary, saving Vodafone an estimated £2.2 billion.

The CFC legislation applies to companies which hold over 25% interest in companies which are resident outside the UK in countries where they are subject to a “lower level of taxation” and which are controlled by UK residents. This “lower level of taxation” is a rate less than three quarters of the amount of the tax that would be payable had the subsidiary been resident in the UK.

Vodafone submitted that compliance with the CFC legislation is more burdensome than compliance where a parent has a UK-resident.

It was held that the CFC legislation must be disapplied so that no charge can be imposed on a company such as Vodafone under the CFC legislation pending the CFC legislation being amended. It followed that HMRC’s enquiry into Vodafone’s tax return for the accounting period in question has no legitimate purpose and should be closed.

The case does not have any direct effect on the CFC legislation as it affects subsidiaries outside the EU. However, the decision clearly has implications for any UK-resident companies holding CFCs resident elsewhere within the EU by demonstrating that the CFC legislation, as it was in 2001, is unenforceable. It represents a serious blow to HMRC who have since tweaked the CFC legislation following the Cadbury Schweppes case, as it brings into question the enforceability of that amended legislation. HMRC have already begun a process of reviewing the CFC legislation and the taxation of multi-nationals.
HMRC intend to appeal the decision.

If you have any queries regarding this case, please contact:

Jim Mottram
Partner
NABARRO LLP
T +44 (0)20 7524 6468
j.mottram@nabarro.com