United Kingdom Corporation Tax - Interaction With European Law

Interaction With European Law

Although there are no European Union directives dealing with direct taxes, UK laws must comply with European legislation. In particular, legislation should not be discriminatory under the EC treaty.

A number of cases where UK tax laws are believed to be discriminatory have been brought to the European Court of Justice, usually with respect to freedom of establishment and freedom of movement of capital. Key cases which have been decided include:

• Hoechst — where the Court found that the way the partial imputation system operated prior to its abolition in 1999 was discriminatory;
• Lankhorst-Hohorst — a German case which implied that the UK's transfer pricing and thin capitalisation legislation may have been contrary to EU legislation (the 2004 Finance Act made changes to counter this threat);
• Marks and Spencer — where it was claimed that UK parents should be able to relieve the losses of overseas subsidiaries against the tax profits of their UK subgroup (On 7 April 2005, the Advocate-General gave an opinion supporting the claim of a UK parent to offset losses of its EU subsidiaries, where no effective loss relief was available in the EU Member States the subsidiaries were resident in). However, in the final judgment, a compromise agreement was reached in which the national interest to prevent excessive loss of tax was held to outweigh in most circumstances the restriction on the freedom of movement of capital. Accordingly, although no specific new legislation has been introduced, relief for overseas losses will only be available where they may not be utilised in the overseas jurisdiction;
• Cadbury Schweppes — where it was ruled that CFC rules are only acceptable if they relate to wholly artificial arrangements intended to escape the UK tax normally payable.

Also, the case of ICI v Colmer led to the UK amending its definition of a group, for group relief purposes. Previously, the definition required that all companies and intermediate parent companies in a group to be UK resident.

There are also a number of other cases making their way, slowly, up to the European Court. In particular:

• A Group Litigation Order arguing that dividends received from overseas companies should be exempt from tax in the same way as dividends received from UK companies are exempted from tax;
• Claims that the UK CFC legislation is contrary to EU law (notably Vodafone).