The UK must amend its legislation on the tax treatment of controlled foreign companies, as it fails to fulfil European Union (EU) Treaty obligations or adequately take into account relevant court rulings, the European Commission has said.
The formal request was made on May 19, and takes the form of a reasoned opinion, representing the second step in EU infringement proceedings.
In particular, the Commission points to the continued taxation of the UK profits of subsidiaries established in the EU or in member states of the European Economic Area (EEA). Under EU law, profits of such CFCs should not be subject to additional taxation in the country of the parent company if the subsidiaries are engaged in genuine economic activities.
The Commission stresses that the UK\’s legislative response to the landmark Cadbury Schweppes case in 2006 does not eliminate the discriminatory restriction of the anti-abuse CFC regime, as the rules fail to exclude from the CFC regime all subsidiaries established in EU/EEA member states which are not purely artificial and are not involved in profit-shifting transactions.
Moreover, the Commission considers that, despite having taken corrective measures, the UK is still not fulfilling the stipulations of the Treaty on the Functioning of the EU and of the EEA Agreement on the freedom of establishment and free movement of capital.
It is also noted that, in some cases, the UK\’s regulations may lead to the additional taxation of profits made by subsidiaries engaged in genuine economic activities in other EU member states or EEA countries.