Business leaders have hailed a European Court decision that limits the right of the UK government to tax the profits of British-owned subsidiaries overseas.
The Institute of Directors (IoD) has welcomed the European Court’s verdict in the Cadbury-Schweppes case, which argues that – in this case, the UK – British companies do not owe their member state governments taxation on the profits of their subsidiaries in low-tax countries, under the controlled foreign companies (CFC) rules.
However, the Treasury will still be able to tax profits in which it can prove a company has made artificial arrangements to dodge UK tax law.
“Any government needs laws to combat tax avoidance, but those laws should be strictly limited and should not attack genuine commercial structures,” said Richard Baron, head of taxation at the IoD.
But he stressed that the UK will have to target the CFC rules more carefully, and not apply them where subsidiaries have been set up for genuine business reasons. The IoD suggested this will require amendments to the CFC rules.
“One key area will be the interaction between the exemption for arrangements where the motive was not tax avoidance and the exemption where there are substantial business activities (the exempt activities test),” Baron said.
“It may also be time to change to targeting particular types of income, rather than whole companies which are in low-tax countries. But there is no need for the government to go overboard and tighten up the whole corporation tax regime.
“This decision also destroys any lingering illusion that the UK can legislate to defend itself against lower tax rates in other countries.”
