IFA: UK Branch Meeting
Cadbury Schweppes: where are we now?
Paul Davison
9 December 2010
Cadbury Schweppes: where are we now?
 Current context
 ECJ decision: a refresher
 Vodafone 2
 What are “wholly artificial arrangements”?
Cadbury Schweppes: not a recent tax case?
 ECJ decision in 2006
 Both Cadbury Schweppes and Vodafone 2 now settled
 Many others still with legacy CFC issues
 CFC reform in 2012
Cadbury Schweppes: the ECJ decision
Yes
Restriction?
Legitimate
objective?
No
No
No breach
Yes
Yes
Appropriate and
proportionate?
Breach
No
Vodafone 2: UK rules were compliant all along
 What is the conforming interpretation?
S 748 Cases where section 747(3) does not apply
(1) No apportionment under section 747(3) falls to be made as regards an accounting
period of a controlled foreign company if–
…
(f) the company is actually established in another member state of the EEA and carries on
genuine economic activities there.
 Is a conforming interpretation really possible?
 Maybe not, but…
 Would it matter anyway?
 Maybe not, if disapplication is / would do the same thing...
 …because disapplication would be on a case-by-case basis
Vodafone 2: extent of disapplication
Thin Cap GLO
Lankhorst-Hohorst
 Interest paid to foreign related
party…
 Interest paid to foreign related
party…
 …in excess of an arm’s length
amount
 …in excess of an arm’s length
amount
 …where debt:equity exceeds 3:1
→ Only apply to wholly artificial
arrangements
→ Strike out completely
Vodafone 2: conclusion
 We have to decide what the Cadbury Schweppes conditions mean…
 … in particular the difference between
 a “wholly artificial arrangement” that is “intended to escape the national tax
normally payable”; and
 an “actual establishment” that is “intended to carry on genuine economic
activities in the host member state”
The Cadbury Schweppes conditions: what do they mean?
 “Wholly artificial arrangements”
"wholly artificial arrangements aimed at circumventing the application of
the legislation of the member state concerned"
"wholly artificial arrangements which do not reflect economic reality, with
a view to escaping the tax normally due on the profits generated by
activities carried out on national territory"
"fictitious establishment not carrying out any genuine economic activity
in the territory of the host member state"
The Cadbury Schweppes conditions: what do they mean?
 “Actual establishment” and “genuine economic activities”
"actual establishment of the company concerned in the host member state
and the pursuit of genuine economic activity there"
"the incorporation of a CFC reflects economic reality... That incorporation
must correspond with an actual establishment intended to carry on genuine
economic activities in the host member state"
The Cadbury Schweppes conditions: earlier cases
ICI
Factortame
EC Commission v UK
Lankhorst
-Hohorst
Cadbury Schweppes
de Lasteyrie du
Sallant
Marks & Spencer
Halifax
X
EmslandStärke
Re Eurofood IFSC
Ltd
Cadbury Schweppes: mixed activity companies
UK
UK
Non-UK
EU OpCo
Loans
Trade
Surplus funds
Cadbury Schweppes: fat capitalisation
M&S
Oy AA
SGI
Thin Cap GLO
EU
EU
EU
EU
Fat cap?
Debt
UK
UK
UK
UK
UK
Equity
EU
Surrender of
tax losses
EU
EU
After-the-fact
payments
transfer taxable
income
Off-market
transactions transfer
taxable income
Excessive debt
transfers taxable
income to parent
Excessive equity
transfers taxable
income to
subsidiary
© Freshfields Bruckhaus Deringer LLP 2010
This material is for general information only and is not intended to provide legal
advice.
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