A landmark ruling issued by the European Court of Justice has gone in favour of Cadbury Schweppes, impairing efforts by the British government to increase taxation in the corporate sector.  

The decision found that UK rules on controlled foreign corporations (CFCs), allowing the British government to tax foreign subsidiaries as if they were UK-based companies, were only applicable to corporations with no real economic activity. In its ruling the Court defined these as “wholly artificial arrangements which do not reflect economic reality”, pointing to ‘letter-box’ or ‘front’ companies as examples. 

Cadbury claimed that CFC rules prevented it from establishing a subsidiary anywhere in the EU to take advantage of a more favourable tax regime. The confectioner brought the case in an attempt to recover GBP8.6m in tax paid to the UK Treasury for Cadbury’s Irish subsidiaries.

The EJC referred the case back to the British legal system to determine whether Cadbury’s Irish units were engaged in economic activity.