Cadbury-Schweppes decision
With the decision in Case Cadbury Schweppes has ECJ established on 12 September 2006, the conditions under which a Member State profits from subsidiaries in low-taxed foreign countries when calculating the corporation should expect should.
Facts and subject of dispute
Under UK external tax law, the profits of a subsidiary are added to the profits of a UK company that owns more than 50% of the subsidiary's shares and taxed at the parent company if the foreign tax rate is less than 75% of the UK tax rate. The tax paid by the subsidiary abroad will be offset. This will not be added if it can be demonstrated that the main aim of this structure is not to avoid British taxation (so-called motive test).
The British parent company of the Cadbury-Schweppes group set up two subsidiaries in Ireland, the task of which was to raise funds for the entire group. Since both companies are based in the particularly low-taxed International Financial Services Center (IFSC) in Dublin, their profits were only taxed at 10%. The British tax authorities considered the requirements for additional taxation to be met and increased the corporation tax payable by the parent company accordingly.
Cadbury Schweppes sued this, claiming that the British rules on additional taxation violated the Community law requirement of freedom of establishment . The competent British court referred this question to the ECJ for decision.
The decision of the ECJ
In a judgment of September 12, 2006 (case C-196/04), the ECJ ruled that the freedom of establishment is restricted if, when adding foreign profits, a distinction is made according to the tax rate in the subsidiary's country of domicile. This could deter companies from setting up subsidiaries in countries with a low level of taxation. The restriction is justified, however, if “ the specific aim of the restriction is to prevent behavior which consists of creating purely artificial arrangements, open to any economic reality, for the purpose of evading the tax normally incurred through domestic activities profits made is owed ”(paragraph 55 of the judgment).
The company's aim to minimize its tax burden and to exploit the different corporate tax rates existing in the member states does not justify the assumption of such an abusive structure. In addition to this subjective element, objectively verifiable criteria must also be added (paragraph 67 of the judgment). Only if “ the controlled foreign company is only related to a fictitious settlement that does not develop any real economic activity in the territory of the host Member State, the establishment of this controlled foreign company is to be regarded as a purely artificial arrangement. This could particularly be the case with a subsidiary that is a "letterbox company" or a "straw company". "(Paragraph 68 of the judgment)
The ECJ leaves it to the referring court to decide whether the exception to the “motive test” provided for in British external tax law can be interpreted in such a way that it meets these requirements. The information from the Irish authorities necessary for the examination of the objective criteria should, if necessary, be forced through the provisions of the Mutual Assistance Directive.
Effects of the judgment
The judgment sets strict requirements for the additional taxation provided for in Sections 7-14 of the German Foreign Tax Act. In particular, qualified evidence of an improper design must be provided, which must also be based on objective criteria. Whether the German tax regulations are sufficient is controversial. The Federal Ministry of Finance has now made it clear in a letter that Sections 7-14 of the German Foreign Tax Act are only to be applied if the foreign investment in the EU / EEA area is based on purely artificial arrangements with the aim of obtaining tax breaks.
The adjustment of the external tax law to the ECJ decision took place in 2007. The new Section 8 (2) AStG now excludes additional taxation for domestically controlled companies with their registered office or management in a member state of the EU if the company carries out an actual economic activity and the taxpayer can prove this. For this purpose, the tax authority must have the possibility of verification through intergovernmental administrative assistance.
