Vodafone case judge rules that UK law on CFCs is unenforceable
4 Aug 08
The High Court has issued its judgment in Vodafone's controlled foreign companies (CFC) case.
The judge decided that UK CFC law is in effect unenforceable in respect of CFCs established in EU member states.
He applied the 2006 ruling by the European Court of Justice in the Cadbury case and concluded that UK law is not compatible with that decision.
After the recent House of Lords decision in Condé Nast, he also concluded that it is not up to the courts to decide how to make UK law compatible.
This is a matter for Parliament and, since Parliament has not changed the law, the existing law is ineffective.
As a result, the UK cannot charge tax on the profits of low-taxed EU-based subsidiaries.
While this judgement will be a blow to the UK Government, it follows recent case law, which emphasises that UK law must be compatible with the EC Treaties and that it is up to Parliament to make any necessary changes.
However, this ruling is unlikely to cost the Exchequer anything material, since most groups will have aimed to satisfy existing CFC exemptions.
It should, however save them the administrative costs of debating the exact status with HMRC.
The Government changed the CFC legislation in December 2006 and this case does not consider whether the new law is similarly ineffective.
Nonetheless, the new law has been widely criticised as not complying with the Cadbury judgment and it is likely that some groups may choose to litigate in respect of the new law.