Cadbury Schweppes and beyond: the future of the UK CFC Rules Part II

Richard Wellens is a part-time student of the University of London’s MA in Taxation, delivered through the Institute of Advanced Legal Studies and works in the Corporate Finance division of Commerzbank in London. He is responsible for structuring and executing tax-efficient financing transactions both for the bank and its clients, utilising debt and equity-based structures in the UK and other European jurisdictions. Richard can be contacted at richard.wellens@commerzbank.com.

In Part I of his article which looks at the UK’s CFC legislation and appeared in last month’s International Tax Report, Richard Wellens outlined the key elements of the UK CFC legislation before explaining and analysing the landmark Cadbury Schweppes judgment handed down by the ECJ. The first part of the article highlighted the inconsistency between the ECJ judgment and the UK government’s subsequent legislative response to it. Whereas the ECJ ruled how one might consider an arrangement to be wholly artificial on the basis of ‘the extent to which the CFC physically exists in terms of premises, staff and equipment’, the UK government’s interpretation was based upon the conclusions drawn in the Advocate General’s opinion and, in the opinion of the author, the legislative response was drafted in line with the AG’s opinion and not the final ECJ ruling. Part II of the article switches the focus to the domestic courts, by examining and analysing the Vodafone 2 case which followed shortly after Cadbury Schweppes. It first looks at the judgment handed down by Mr Justice Evans-Lombe in the High Court which appeared to signal the death knell for the UK’s CFC legislation. However, in the subsequent Court of Appeal judgment, the starting point used by the Court to determine whether or not the UK’s CFC legislation can be interpreted in such a way so as to either i) justify a restriction of the fundamental freedoms or ii) constitute no restriction at all, is a further examination of the concept of conforming interpretation and has – at least in the short term – thrown the legislation a lifeline. The article concludes with some thoughts on these two key cases in the field of CFC legislation, before summarising to what extent the CFC rules will remain in their current form for the next 25 years.