David Harkness and Robert Sharpe consider the CJEU judgment in SCA Group Holding BV and its significance to the UK CFC rules
On 12 June, the CJEU issued its judgment in SCA Group Holding BV and others (C-39/13, C-40/13 and C-41/13). The reasoning is of significance for the new controlled foreign company (CFC) rules.
The cases related to the Dutch fiscal unity regime, which allows groups of companies to offset their profits and losses and submit a tax return for Dutch corporate income tax purposes on a consolidated basis. The Dutch rules prohibit a fiscal unity where the ‘link’ between the Dutch companies involved was not itself a Dutch taxpayer. Two fact patterns in relation to applications for fiscal unity were considered by the CJEU: the first where a Dutch parent owned a German subsidiary which in turn owned Dutch sub-subsidiaries; and the second where Dutch sister companies had a common German parent but no common Dutch parent. Both applications had been rejected on the ground that the German link company was neither established nor had a permanent establishment in the Netherlands.
The CJEU considered the compatibility of these applications with the freedom of establishment principle in article 49 of the Treaty on the Functioning of the European Union (TFEU). Unsurprisingly, the CJEU held that:
The judgment itself is of some direct relevance to the UK group relief rules. But its reasoning in relation to the purported justification of preventing tax avoidance is of wider interest because the CJEU cited its Cadbury Schweppes (C-196/04) judgment with approval as constituting ‘settled case law’. The CJEU reiterated that the risk of tax avoidance is not itself an overriding reason in the public interest, unless it has a specific objective of combating ‘wholly artificial arrangements’ which do not reflect economic reality. Readers will remember that demonstrating an arrangement is ‘wholly artificial’ is likely to be difficult, the CJEU having referred in Cadbury Schweppes to this as meaning ‘a fictitious establishment not carrying out any genuine economic activity’.
As we have previously noted, it seems likely that the UK CFC rules are not compliant with EU law, since they lack an entity-based exemption for companies actually established and conducting genuine economic activities in other member states. The UK government sought to justify this in its June 2011 consultation document (Consultation on controlled foreign companies reform) by treating CFC cases, such as Cadbury Schweppes, and transfer pricing cases, which rely on the arm’s length principle, as forming part of a wider body of anti-tax avoidance case law.
This argument is implicitly rejected in SCA Group Holding, in which the CJEU specifically cited the language used in Cadbury Schweppes without reference to any wider body of EU anti-tax avoidance jurisprudence. Accordingly, the judgment casts further doubt on the UK government’s position and the compatibility of the CFC rules with EU law. As a result, taxpayers will continue to have a strong argument that an exemption should be read into the CFC rules to exempt genuine economic activities conducted by CFCs actually established in other member states.
David Harkness and Robert Sharpe consider the CJEU judgment in SCA Group Holding BV and its significance to the UK CFC rules
On 12 June, the CJEU issued its judgment in SCA Group Holding BV and others (C-39/13, C-40/13 and C-41/13). The reasoning is of significance for the new controlled foreign company (CFC) rules.
The cases related to the Dutch fiscal unity regime, which allows groups of companies to offset their profits and losses and submit a tax return for Dutch corporate income tax purposes on a consolidated basis. The Dutch rules prohibit a fiscal unity where the ‘link’ between the Dutch companies involved was not itself a Dutch taxpayer. Two fact patterns in relation to applications for fiscal unity were considered by the CJEU: the first where a Dutch parent owned a German subsidiary which in turn owned Dutch sub-subsidiaries; and the second where Dutch sister companies had a common German parent but no common Dutch parent. Both applications had been rejected on the ground that the German link company was neither established nor had a permanent establishment in the Netherlands.
The CJEU considered the compatibility of these applications with the freedom of establishment principle in article 49 of the Treaty on the Functioning of the European Union (TFEU). Unsurprisingly, the CJEU held that:
The judgment itself is of some direct relevance to the UK group relief rules. But its reasoning in relation to the purported justification of preventing tax avoidance is of wider interest because the CJEU cited its Cadbury Schweppes (C-196/04) judgment with approval as constituting ‘settled case law’. The CJEU reiterated that the risk of tax avoidance is not itself an overriding reason in the public interest, unless it has a specific objective of combating ‘wholly artificial arrangements’ which do not reflect economic reality. Readers will remember that demonstrating an arrangement is ‘wholly artificial’ is likely to be difficult, the CJEU having referred in Cadbury Schweppes to this as meaning ‘a fictitious establishment not carrying out any genuine economic activity’.
As we have previously noted, it seems likely that the UK CFC rules are not compliant with EU law, since they lack an entity-based exemption for companies actually established and conducting genuine economic activities in other member states. The UK government sought to justify this in its June 2011 consultation document (Consultation on controlled foreign companies reform) by treating CFC cases, such as Cadbury Schweppes, and transfer pricing cases, which rely on the arm’s length principle, as forming part of a wider body of anti-tax avoidance case law.
This argument is implicitly rejected in SCA Group Holding, in which the CJEU specifically cited the language used in Cadbury Schweppes without reference to any wider body of EU anti-tax avoidance jurisprudence. Accordingly, the judgment casts further doubt on the UK government’s position and the compatibility of the CFC rules with EU law. As a result, taxpayers will continue to have a strong argument that an exemption should be read into the CFC rules to exempt genuine economic activities conducted by CFCs actually established in other member states.
