CFCs & International Law

Question 1

Bricom Holdings v IRC (1997)

Answer 1

UK CFC rules, was income subject to these provisions not subject to UK tax under the terms of UK-Dutch treaty. Held that the character of the income subject to tax in the UK under the CFC rules was altered by the operation of the rules, as it was only taxed as ‘notional’ income, with the tax charge being based on provisions which ‘deemed’ the income to be subject to UK tax in hands of UK company. Such charge and income was not within the terms of the treaty.

Use: CFC rules and compatibility with international law

Question 2

Schneider Electric SA (2002)

Answer 2

Profits of Swiss sub not attributable to Schneider (the French parent company) under the French CFC rules, as the business profits article of the Swiss-French treaty applied, and only the Swiss had taxing rights. The treaty applied in preference to domestic French
law.

Use: CFC rules and compatibility with international law; application of treaty in preference to domestic law

Question 3

Cadbury Schweppes

Answer 3

Involved two Irish subs controlled from the UK by
the UK parent company Cadbury Schweppes. The ECJ held that the UK CFC rules were discriminatory and a restriction on the freedom of establishment (which is
enshrined in the EU Treaties).

However, they considered the justification put
forward by the UK government of the need for such legislation to combat ‘tax avoidance’. It was accepted this was a justification, however, the UK provisions
went too far (they were contrary to the principle of proportionality) in that the UK rules did not target only “wholly artificial arrangements”, but were much broader in scope.

Use: CFC rules and compatibility with international law, influence and impact of the EU Treaties on its Member States, tax avoidance purpose of legislation