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Taxation: Commission requests UK to further amend its treatment of controlled foreign corporations (CFCs)

The European Commission has formally requested the United Kingdom to amend its legislation to better take into account the rulings of the EU's Court of Justice on the tax treatment of controlled foreign corporations (CFCs). 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.

The Commission's request takes the form of a reasoned opinion (second step of EU infringement proceedings).

In the absence of a satisfactory response within two months, the Commission may refer the United Kingdom to the EU's Court of Justice.

The Commission considers that the measures put in place by the UK are not a sufficient response to the EU's Court of Justice decisions in Cases C-196/04 Cadbury Schweppes and C-201/05 Test Claimants in the CFC and Dividend GLO.

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.

The Commission sent a letter of formal notice to the UK on 22 March 2010.

The United Kingdom sent a reply to the Commission on 15 July 2010. The elements provided were not considered satisfactory by the Commission.

For the press releases issued on infringement proceedings in the area of taxation or customs see:

For more information on EU infringement procedures, see MEMO/11/312.

For the most up-to-date general information on the infringement proceedings initiated against Member States, see:

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