IoD welcomes European Court tax decision

12th September 2006

The Institute of Directors welcome today's European Court decision in the Cadbury Schweppes case. The decision limits the right of the UK to tax the profits of UK-owned subsidiaries in low-tax countries, under the controlled foreign companies (CFC) rules.

The UK will still be able to tax those profits where there is objective evidence of wholly artificial arrangements which have been made in order to get round UK tax law. That is perfectly reasonable. But 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.

Richard Baron, Head of Taxation at the IoD, said:

"Any government needs laws to combat tax avoidance, but those laws should be strictly limited and should not attack genuine commercial structures. This decision will require some changes 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).

"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. There is one big way to keep the UK competitive, and that is to reduce the corporation tax rate. A 2% cut now would be a very good move."