The European Commission requests UK to further amend its CFC legislation

2011-05-24

 

The European Commission (the EC) has sent the United Kingdom a reasoned opinion, the second stage of the infringement procedure under Article 258 of the Treaty on the Functioning of the EU (TFEU),  in which it requested the UK to amend its legislation on controlled foreign corporations (CFCs). According to this legislation (the UK CFC Legislation) income of non-UK subsidiaries owned by UK taxpayers may under circumstances immediately be included in the income of these UK taxpayers, without dividend distribution or share disposal.     
 
The EC’s position is that the UK CFC Legislation, even though it has recently been amended, is still not compatible with the principles of free movement of capital and freedom of establishment, as incorporated in the TFEU. Also, the decisions issued by the European Court of Justice (ECJ) in  the so-called ‘Cadbury Schweppes case’ and the ‘Test Claimants in the CFC and Dividends GLO case’,  have according to the EC been unduly implemented. The reason is that the UK CFC Legislation does not exclude subsidiaries established in an EU/EEA state, which are not purely artificial and are not involved in profit-shifting transactions.

If the UK CFC Legislation is not amended within 2 months, the matter may be referred to the ECJ.