Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd v Commissioners of Inland Revenue.

• Jurisdiction: European Union
• Celex Number: 62004CJ0196
• ECLI: ECLI:EU:C:2006:544
• Date: 12 September 2006
• Docket Number: C-196/04
• Court: Court of Justice (European Union)
• Procedure Type: Reference for a preliminary ruling

Case C-196/04

Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd

v

Commissioners of Inland Revenue

(Reference for a preliminary ruling from the

Special Commissioners of Income Tax, London)

(Freedom of establishment – Law on controlled foreign companies – Inclusion of the profits of controlled foreign companies in the tax base of the parent company)

Summary of the Judgment

1. Freedom of movement for persons – Freedom of establishment

(Arts 43 EC and 48 EC)

2. Freedom of movement for persons – Freedom of establishment – Tax legislation

(Arts 43 EC and 48 EC)

1. The mere fact that a resident company establishes a secondary establishment, such as a subsidiary, in another Member State cannot set up a general presumption of tax evasion and justify a measure which compromises the exercise of a fundamental freedom guaranteed by the Treaty. On the other hand, a national measure restricting freedom of establishment may be justified on the ground of prevention of abusive practices where it specifically relates to wholly artificial arrangements, which do not reflect economic reality, aimed at circumventing the application of the legislation of the Member State concerned, in particular with a view to escaping the tax normally due on the profits generated by activities carried out on national territory.

(see paras 50-51, 55)

2. Articles 43 EC and 48 EC must be interpreted as precluding the inclusion in the tax base of a resident company established in a Member State of profits made by a controlled foreign company in another Member State, where those profits are subject in that State to a lower level of taxation than that applicable in the first State, unless such inclusion relates only to wholly artificial arrangements intended to escape the national tax normally payable. Accordingly, such a tax measure must not be applied where it is proven, on the basis of objective factors which are ascertainable by third parties, that despite the existence of tax motives that controlled company is actually established in the host Member State and carries on genuine economic activities there.

(see para. 75, operative part)

JUDGMENT OF THE COURT (Grand Chamber)

12 September 2006 (*)

(Freedom of establishment – Law on controlled foreign companies – Inclusion of the profits of controlled foreign companies in the tax base of the parent company)

In Case C-196/04,

REFERENCE for a preliminary ruling under Article 234 EC by the Special Commissioners of Income Tax, London (United Kingdom), made by decision of 29 April 2004, received at the Court on 3 May 2004, in the proceedings

Cadbury Schweppes plc,

Cadbury Schweppes Overseas Ltd

v

Commissioners of Inland Revenue,

THE COURT (Grand Chamber),

composed of V. Skouris, President, P. Jann and A. Rosas, Presidents of Chambers, J.N. Cunha Rodrigues, R. Silva de Lapuerta, K. Lenaerts (Rapporteur), E. Juhász, G. Arestis and A. Borg Barthet, Judges,

Advocate General: P. Léger,

Registrar: C. Strömholm, Administrator,

having regard to the written procedure and further to the hearing on 13 December 2005,

after considering the observations submitted on behalf of:

– Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd, by J. Ghosh, Barrister, and J. Henderson, adviser,

– the United Kingdom Government, by R. Caudwell, acting as Agent, and D. Anderson QC, M. Lester and D. Ewart, Barristers,

– the Belgian Government, by E. Dominkovits, acting as Agent,

– the Danish Government, by J. Molde, acting as Agent,

– the German Government, by A. Tiemann and U. Forsthoff, acting as Agents,

– the Spanish Government, by L. Fraguas Gadea and M. Muñoz Pérez, acting as Agents,

– the French Government, by G. de Bergues and C. Mercier, acting as Agents,

– Ireland, by D. O’Hagan, acting as Agent, and R.L. Nesbitt, A. Collins SC and P. McGarry BL,

– the Italian Government, by I.M. Braguglia, acting as Agent, assisted by A. Cingolo, avvocato dello Stato,

– the Cypriot Government, by A. Pantazi, acting as Agent,

– the Portuguese Government, by L. Fernandes and J. de Menezes Leitão, acting as Agents,

– the Finnish Government, by A. Guimaraes-Purokoski, acting as Agent,

– the Swedish Government, by A. Kruse and I. Willfors, acting as Agents,

– the Commission of the European Communities, by R. Lyal, acting as Agent,

after hearing the Opinion of the Advocate General at the sitting on 2 May 2006,

gives the following

Judgment

1 The reference for a preliminary ruling concerns the interpretation of Articles 43 EC, 49 EC and 56 EC.

2 The reference was made in proceedings between Cadbury Schweppes plc (‘CS’) and Cadbury Schweppes Overseas Ltd (‘CSO’) on the one hand and the Commissioners of Inland Revenue on the other hand concerning the taxation of CSO in respect of the profits made in 1996 by Cadbury Schweppes Treasury International (‘CSTI’), a subsidiary of the Cadbury Schweppes group established in the International Financial Services Center in Dublin (Ireland) (‘the IFSC’).

National legislation

3 The tax legislation of the United Kingdom of Great Britain and Northern Ireland provides that a company resident in that Member State within the meaning of that legislation (‘the resident company’) is subject in that State to corporation tax on its worldwide profits. Those profits include the profits made by branches or agencies through which the resident company carries on its activities outside the United Kingdom.

4 On the other hand, the resident company is not generally taxed on the profits of its subsidiaries as they arise. Nor is it taxed on dividends distributed by a subsidiary established in the United Kingdom. Dividends distributed to a resident company by a subsidiary established abroad are taxed in the hands of that company. In order to prevent double taxation, the United Kingdom tax legislation provides, however, for the grant of a tax credit to the resident company up to the amount of the tax which was paid by the foreign subsidiary as the profits arose.

5 The United Kingdom legislation on controlled foreign companies (‘CFCs’) provides for an exception to the general rule that a resident company is not taxed on the profits of a subsidiary as they arise.

6 That legislation, which is contained in sections 747 to 756 and Schedules 24 to 26 of the Income and Corporation Taxes Act 1988, provides that the profits of a CFC – namely, under the version of that legislation applicable at the time of the facts in the main proceedings (‘the legislation on CFCs’), a foreign company in which the resident company owns a holding of more than 50% – are attributed to the resident company and taxed in its hands, by means of a tax credit for the tax paid by the CFC in the State in which it is established. If those same profits are then distributed in the form of dividends to the resident company, the tax paid by the latter in the United Kingdom on the profits of the CFC is treated as additional tax paid by the latter abroad and gives rise to a tax credit payable in respect of the tax owed by the resident company on those dividends.

7 The legislation on CFCs is designed to apply when the CFC is subject, in the State in which it is established, to a ‘lower level of taxation’, which is the case, under that legislation, in respect of any accounting period in which the tax paid by the CFC is less than three quarters of the amount of tax which would have been paid in the United Kingdom on the taxable profits as they would have been calculated for the purposes of taxation in that Member State.

8 The taxation which is attributable to the application of the legislation on CFCs is accompanied by a number of exceptions. According to the version of that legislation in force at the time of the facts in the main proceedings, that taxation does not apply in any of the following cases:

– the CFC adopts an ‘acceptable distribution policy’, which means that a specified percentage (90% in 1996) of its profits are distributed within 18 months of their arising and taxed in the hands of a resident company;

– the CFC is engaged in ‘exempt activities’ within the meaning of that legislation, such as certain trading activities carried out from a business establishment;

– the CFC satisfies the ‘public quotation condition’, which means that 35% of the voting rights are held by the public, the subsidiary is quoted and its securities are dealt in on a recognised stock exchange, and

– the CFC’s chargeable profits do not exceed an amount set at UK £50 000 (de minimis exception).

9 The taxation provided for by the legislation on CFCs is also excluded when ‘the motive test’ is satisfied. The latter involves two cumulative conditions.

10 First, where the transactions which gave rise to the profits of the CFC for the accounting period in question produce a reduction in United Kingdom tax compared to that which would have been paid in the absence of those transactions and where the amount of that reduction exceeds a certain threshold, the resident company must show that such a reduction was not the main purpose, or one of the main purposes, of those transactions.

11 Secondly, the resident company must show that it was not the main reason, or one of the main reasons, for the SEC’s existence in the accounting period concerned to achieve a reduction in United Kingdom tax by means of the diversion of profits. According to that legislation, there is a diversion of profits if it is reasonable to suppose that, had the SEC or any related company established outside the United Kingdom not existed, the receipts would have been received by, and been taxable in the hands of, a United Kingdom resident.

12 The...