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The European Commission has formally requested the UK to amend its legislation to take into account rulings of the European Court of Justice on the tax treatment of controlled foreign corporations (CFCs).
Despite the court’s decision in Cadbury Schweppes plc v CRC (Case C-196/04) [2006] STC 1908, the commission believes the UK is still not complying with EU law on the freedom of establishment and free movement of capital. In particular, the UK continues to tax in the UK profits of subsidiaries established in the EU or the European Economic Area (EEA).
The request takes the form of a reasoned opinion (second step of EU infringement proceedings) and, in the absence of a satisfactory response within two months, the commission may refer the UK to the European Court of Justice.
The current Finance Bill contains some changes to the CFC regime, and consultation on the subject is also promised. Regardless of these moves, Gary Richards, tax partner at Berwin Leighton Paisner, said the latest EU request suggests the ‘new proposals may need to be revised before they have even become law’.
He added that ‘if HMRC choose to wait for the outcome of the challenge, rather than adjust their current proposals, the continuing uncertainty over CFC rules will deter investors just at a time when the end seemed in sight’.
