European Commission requests UK to further amend its treatment of controlled foreign corporations

Despite the 2006 Court’s ruling in the Cadbury Schweppes case, the UK is still not complying with EU law on 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 in Member States of the European Economic Area (EEA). Under EU law, profits of CFCs – which are subsidiaries of companies established in EU Member States or in EEA countries – should not be subject to additional taxation in the country of the parent company if the subsidiaries are engaged in genuine economic activities.

Despite the corrective measures taken by the UK, the Commission considers that the UK is still not fulfilling its obligations under Articles 49 and 63 (freedom of establishment and free movement of capital) of the Treaty on the Functioning of the EU and Articles 31 and 40 of the European Economic Area Agreement.

Indeed, UK provisions may lead, in certain cases, to an additional taxation of profits made by subsidiaries engaged in genuine economic activities in other EU Member States or EEA countries.

In the Commission’s view, the UK’s legislative response to the above rulings does not eliminate the discriminatory restriction of the anti-abuse CFC regime. The new provisions allow a UK taxpayer to reduce the taxable basis of a UK-owned CFC under certain restrictive conditions. However, they fail to exclude from the CFC regime all subsidiaries established in EU/EEA Member States which are not purely artificial and are not involved in profit-shifting transactions.