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HMRC internal manual

International Manual

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Controlled Foreign Companies: EEA states - deduction for net economic value against apportionment: Introduction to Controlled Foreign Companies: EEA states - deduction for net economic value against apportionment

FA07/SCH15 included legislation that amends the UK controlled foreign companies’ rules with effect from 6 December 2006.

This represents the Government’s response to the decision of the European Court of Justice on 12 September 2006 in the case of Cadbury Schweppes plc, Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue (case C-196/04).

The case concerned the compatibility of controlled foreign companies’ rules with the Freedom of Establishment provided by the EU treaty, which allows companies resident in one Member State to participate unhindered, on a stable and continuing basis, in the economic life of another Member State by the pursuit of genuine economic activities through an actual establishment in that State.

The ECJ decided that controlled foreign companies’ rules pursue a legitimate aim and are compatible with European law - so long as they are not applied to the profits of genuine economic activities undertaken in an actual establishment in another Member State.

In such circumstances controlled foreign companies’ rules must ensure that the parent company is “…. given an opportunity to produce evidence that a controlled foreign company is actually established [in another Member State] and that its activities are genuine”. If it can, controlled foreign companies rules must not be applied to the profits of any genuine economic activities in such a business establishment in another Member State.

The Government is satisfied that the UK’s controlled foreign companies legislation was compatible with European law as interpreted by the ECJ in Cadbury Schweppes. But the Government recognises that there may be circumstances at the margins where it may not have been entirely clear.

The Government therefore decided to amend the controlled foreign companies legislation in Chapter IV of Part XVII ICTA to reflect the judgment explicitly in the rules, and to provide a clear and certain procedure for companies to produce evidence to prove the extent of a controlled foreign company’s genuine economic activities undertaken in a business establishment in another Member State and establish what amount (if any) of a controlled foreign company’s profits should be excluded from the controlled foreign companies charge.