Tag: CFC

Controlled Foreign Companies (CFC), usually located in low tax jurisdictions, that are controlled by a resident shareholder.  CFC legislation is usually designed to combat the sheltering of profits in companies resident in low- or no-tax jurisdictions. An essential feature of such regimes is that they attribute a proportion of the income sheltered in such companies to the shareholder resident in the country concerned. Generally, only certain types of income fall within the scope of CFC legislation, i.e. passive income such as dividends, interest and (embedded) royalties/income from intangibles.

European Commission vs. UK, April 2019, European Commission, Case no C(2019) 2526 final

European Commission vs. UK, April 2019, European Commission, Case no C(2019) 2526 final

Back in 2017 the European Commission opened an in-depth probe into a UK scheme that exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance. The EU commission concluded its investigations in a decision issued 2 April 2019. According to the decision the UK “Group Financing Exemption” is in breach of EU State aid rules. Under the Scheme foreign multinationals would benefit from tax exemption of profits related to payments of interest on intragroup loans. “In conclusion, the Commission finds that the United Kingdom has unlawfully implemented the contested measure to the benefit of certain UK resident companies in breach of Article 108(3) of the Treaty. The Commission also finds that the Group Financing Exemption constitutes State aid that is incompatible with the internal market within the meaning of Article 107(1) of the Treaty, in as far as it applies to non-trading finance profits from qualifying loan relationships, which profits fall within Section 371EB (UK ... Read more
Australia vs BHP Billiton, January 2019, Federal Court of Australia, Case No [2019] FCAFC 4

Australia vs BHP Billiton, January 2019, Federal Court of Australia, Case No [2019] FCAFC 4

Mining group BHP Billiton had not in it’s Australian CfC income included income from associated British group companies from sales of Australian goods through Singapore. The tax authorities held that the British companies in BHP’s dual-listed company structure fell within a definition of “associate”, and part of the income should therfore be taxed in Australia under local CfC legislation. In December 2017 BHP won the case in an administrative court but this decision was appealed to the Federal Court by the authorities. The Federal Court found in favor of the tax authority. The court found that both BHP’s Australian and British arms are associates, and therefore subject to tax in Australia under Australien CfC rules. BHP has now asked the High Court for leave to appeal. Australia v BHP jan 2019 FC AFC 4 ... Read more
The EU Anti Tax Avoidance Package - Anti Tax Avoidance Directives (ATAD I & II) and Other Measures

The EU Anti Tax Avoidance Package – Anti Tax Avoidance Directives (ATAD I & II) and Other Measures

Anti Tax Avoidance measures are now beeing implemented across the EU with effect as of 1 January 2019. The EU Anti Tax Avoidance Package (ATAP) was issued by the European Commission in 2016 to counter tax avoidance behavior of MNEs in the EU and to align tax payments with value creation. The package includes the Anti-Tax Avoidance Directive, an amending Directive as regards hybrid mismatches with third countries, and four Other measures. ATAD I The Anti-Tax Avoidance Directive (ATAD), COUNCIL DIRECTIVE (EU) 2016/1164 of 12 July 2016, introduces five anti-abuse measures, against tax avoidance practices that directly affect the functioning of the internal market. 1) Interest Limitation Rule  – Reduce profitshifting via exessive interest payments (Article 4) 2) Exit Taxation – Prevent tax motivated movement of valuable business assets (eg. intangibles) across borders (Article 5) 3) General Anti-Avoidance Rule (GAAR) – Discourage Artificial Arrangements (Article 6) 4) Controlled Foreign Company (CFC) – Reduce profits shifting to low tax jurisdictions (Article 7, 8) 5) Hybrid Mismatch Rule – ... Read more
Germany vs Cyprus Ltd, June 2018, BFH judgment Case No IR 94/15

Germany vs Cyprus Ltd, June 2018, BFH judgment Case No IR 94/15

The Bundesfinanzhof confirmed prior case law according to which the provisions on hidden deposits and hidden profit distributions must be observed in the context of the additional taxation. On the question of economic activity of the controlled foreign company, the Bundesfinanzhof refers to the ruling of the European Court of Justice concerning Cadbury-Schweppes from 2006. According to paragraphs §§ 7 to 14 in the Außensteuergesetz (AStG) profits from controlled foreign companies without business activity can be taxed in Germany. In the case at hand the subsidiary was located in a rented office in Cyprus and employed a resident managing director. Her job was to handle correspondence with clients, to carry out and supervise payment transactions, manage business records and keep records. She was also entrusted with obtaining book licenses to order these sub-licenses for the benefit of three of Russia’s and Ukraine’s affiliates, which distributed the books in the Russian-speaking market. The license income earned by subsidiary was taxed at ... Read more
Japan vs Denso Singapore, November 2017, Supreme Court of Japan

Japan vs Denso Singapore, November 2017, Supreme Court of Japan

A tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a Japanese Group’s (Denso), subsidiary in Singapore. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. According to the Supreme Court, total revenue, number of employees, and fixed facilities are relevant in this determination. The Singapore subsidiary managed it’s own subsidiaries or affiliates in other territories, and while the income from services to logistics in those territories represented 85% of its revenue, between 80% and 90% of it’s income came from dividends from its subsidiaries and affiliates. The Supreme Court held that the Singapore subsidiary had conducted a broad range of businesses – including finance and logistics – with the economically rational purpose ... Read more
European Commission vs. UK, October 2017, State aid, CFC

European Commission vs. UK, October 2017, State aid, CFC

The European Commission has opened an in-depth probe into a UK scheme that exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance. It will investigate if the scheme allows these multinationals to pay less UK tax, in breach of EU State aid rules. European Commission vs. UK, October 2017, state aid CFC ... Read more
Japan vs "TH Corp", January 2017, District Court, Case No. 56 of 2014 (Gyoseu)

Japan vs “TH Corp”, January 2017, District Court, Case No. 56 of 2014 (Gyoseu)

A tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a “TH Corp”‘s, subsidiary in Singapore. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. Judgement of the court. According to the court, total revenue, number of employees, and fixed facilities are relevant in this determination. The Court held that the Singapore subsidiary had conducted a broad range of businesses – including finance and logistics – with the economically rational purpose of streamlining its ASEAN operations, and thus set aside the CFC taxation. Excerpt “Satisfaction of the substance and control criteria (a) According to the above-mentioned findings, A1 rents an office in Singapore and uses it for the regional ... Read more
Japan vs Cayman Islands Corp, 2008, Tokyo District Court 2011 ( Gyou ) nr 370

Japan vs Cayman Islands Corp, 2008, Tokyo District Court 2011 ( Gyou ) nr 370

In this case a tax assessment based on Japanese CFC rules (anti-tax haven rules) had been applied to a Japanese Group’s subsidiary on Cayman Islands. According to Japanese CFC rules, income arising from a foreign subsidiary located in a state or territory with significantly lower tax rates is deemed to arise as the income of the parent company when the principal business of the subsidiary is holding shares or IP rights. However, the CFC rules do not apply when the subsidiary has substance and it makes economic sense to conduct business in the subsidiary in the low tax jurisdiction. The Court upheld the tax assessment. Click here for English translation 084760_hanrei Cayman ... Read more
UK vs Cadbury- Schweppes, September 2006, European Court of Justice, Case C-196/04

UK vs Cadbury- Schweppes, September 2006, European Court of Justice, Case C-196/04

The legislation on ‘controlled foreign companies’ in force in the United Kingdom provided for the inclusion, under certain conditions, of the profits of subsidiaries established outside the United Kingdom in which a resident company has a controlling holding. The UK tax authorities thus claimed from the parent company of the Cadbury Schweppes group, established in the United Kingdom, tax on the profits made by one of the subsidiaries of the group established in Ireland, where the tax rate was lower. The Court was asked to consider whether this legislation was compatible with the provisions of the Treaty on freedom of establishment (Articles 43 and 48 EC). The Court recalled that companies or persons could not improperly or fraudulently take advantage of provisions of Community law. However, the fact that a company has been established in a Member State for the purpose of benefiting from more favourable tax legislation does not in itself suffice to constitute abuse of the freedom of ... Read more