CFC rules & Cadbury Schweppes case C-196/04 Petra Airas 238733 28.4.2015

CFC rules Controlled foreign corporation rules CFC rules were created to prevent tax evasion and to discourage companies from shifting income to countries where tax rate is really low CFC rules differ from country to country CFC laws work alongside tax treaties Legislation on CFCs (väliyhteisölainsäädäntö) The legislation on CFCs is designed to apply when the CFC is subject, in the State in which it is established, to a 'lower level of taxation', which is the case, under that legislation, in respect of any accounting period in which the tax paid by the CFC is less than three quarters of the amount of tax which would have been paid in the United Kingdom on the taxable profits as they would have been calculated for the purposes of taxation in that Member State.

Cadbury Schweppes case freedom of establishment (art.49 EC) Parent company established in the United Kingdom Two subsidaries (CSTS and CSTI) in Ireland where the tax rate was lower 10% According to the decision making the reference, it is clear that CSTS and CSTI were established in Dublin solely in order that the profits related to the internal financing activities of the Cadbury Schweppes group could benefit from the tax regime of the IFSC. Given the rate of tax applicable to companies established in the IFSC, the profits of CSTS and CSTI were subject to 'a lower level of taxation' within the meaning of the legislation on CFCs. The United Kingdom tax authorities took the view that, for the 1996 financial year, none of the conditions for exemption from taxation provided for by that legislation applied to those subsidiaries. According to the decision making the reference, it is common ground that CSTS and CSTI were established in Dublin solely in order that the profits related to the internal financing activities of the Cadbury Schweppes group could benefit from the tax regime of the IFSC. I - 8038 CADBURY SCHWEPPES AND CADBURY SCHWEPPES OVERSEAS 19 Given the rate of tax applicable to companies established in the IFSC, the profits of CSTS and CSTI were subject to 'a lower level of taxation' within the meaning of the legislation on CFCs. The United Kingdom tax authorities took the view that, for the 1996 financial year, none of the conditions for exemption from taxation provided for by that legislation applied to those subsidiaries. 20 By decision of 18 August 2000, the Commissioners of Inland Revenue therefore claimed, under the CFC legislation, corporation tax from CSO in the sum of GBP 8 638 633.54 on the profits made by CSTI in the financial year ending 28 December 1996. The tax notice related only to the profits made by CSTI because, in that financial year, CSTS made a loss.

Ireland 12,5 UK 30 28 26 24 23 21 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014

Cadbury Schweppes case UK Government forced the company to make up the difference between the Irish and the UK tax rate. The Treasury was claiming more than £8.6m in corporation tax from the company on its Irish subsidiaries from 1996. On 21 August 2000, CS and CSO appealed against that tax notice to the Special Commissioners of Income Tax, London. Before that body, they maintained that the legislation on CFCs was contrary to Articles 43 EC, 49 EC, and 56 EC.

Court’s decision The Court pointed out that a national measure restricting freedom of establishment may be justified only where it specifically relates to wholly artificial arrangements aimed at circumventing the application of the legislation of the Member State concerned and does not go beyond what is necessary to achieve that purpose. CFC legislation must not be applied where it is proven, on the basis of objective factors that despite the existence of tax motives that controlled company is actually established in the host Member State and carries on genuine economic activities there. Court saw that Great Britain’s CFC legislation ristricted in this case freedom of establishment (art. 49).

Impact on finnish legislation Finnish tax administration informs on its website that Finland will follow precept on the basis of Cadbury Schweppes case until new CFC legislation takes effect. In order for a foreign corporate entity to qualify as a controlled foreign corporation for the Finnish CFC regime purposes its actual income tax burden in its state of residence must be less than 3/5 of the tax burden of a Finnish resident corporate entity in Finland.(Väliyhteisöllä tarkoitetaan Suomessa yleisesti verovelvollisen määräämisvallassa olevaa yhteisöä, jonka tuloverotuksen tosiasiallinen taso yhteisön asuinvaltiossa on alhaisempi kuin 3/5 Suomessa asuvan yhteisön verotuksen tasosta täällä.) We have some exemptions when CFC regime must not be applied for instance in shipping business. On the basis of ECJ’s decision on Cadbury Schweppes case CFC regime will not get put into practice in EU/EEA-area, when company is actually established in the host Member State and carries on genuine economic activities there.

http://www2.deloitte.com/content/dam/Deloitte/global/Documents/Tax/dttl-tax-guide-to-cfc-regimes-210214.pdf https://www.vero.fi/fi-FI/Syventavat_veroohjeet/Elinkeinoverotus/Euroopan_yhteisojen_tuomioistuimen_EYT_r%2812127%29 http://www.investopedia.com/terms/c/cfc.asp http://curia.europa.eu/juris/showPdf.jsf?text=&docid=63874&pageIndex=0&doclang=en&mode=lst&dir=&occ=first&part=1&cid=659795 http://ec.europa.eu/dgs/legal_service/arrets/04c196_en.pdf http://www.telegraph.co.uk/finance/2947160/Cadbury-wins-landmark-tax-case-against-Treasury.html Marjaana Helminen, Finnish international taxation