The Supreme Court has refused Vodafone leave to appeal from the Court of Appeal’s decision in Vodafone 2 v The Commissioners for Her Majesty’s Revenue and Customs [2009] EWCA Civ 446.

The case concerned the UK “controlled foreign company” (or “CFC”) rules. Very broadly, these seek to counteract tax avoidance by taxing a UK company on the profits of foreign subsidiaries if certain conditions are satisfied.

In 2006 the European Court of Justice (“ECJ”) ruled (in Cadbury Schweppes plc and others v CIR (Case C-196/04)) that the UK CFC rules were contrary to EC law. The ECJ decided that the rules constituted a disproportionate restriction on the freedom of a parent company to establish subsidiaries in other EU Member States. The ECJ held that, for the CFC rules to be lawful, they would need to be limited to “wholly artificial arrangements”.  

Vodafone had successfully argued in the

High Court

that the consequence of the ECJ’s decision was that the UK CFC rules were invalid. It therefore followed that Vodafone could not be taxed under the CFC rules on profits of its Luxembourg subsidiary. However, the Court of Appeal reversed this decision. It agreed with HM Revenue and Customs that the rules were valid, but that they had to be interpreted in a way which conformed with the decision of the ECJ. The effect was that the CFC rules could only apply where wholly artificial arrangements existed. The consequence for Vodafone is a return to the First Tier Tax Tribunal to argue that, on the facts of its case, the CFC rules, when interpreted in this restrictive way, do not apply to tax Vodafone on the profits of its Luxemburg subsidiary. But first, Vodafone sought to appeal to the Supreme Court.

It was widely expected that this case would be heard by the Supreme Court. After all, it concerns the interaction of UK tax with European legal requirements, a lively area for legal debate. The appeal was also noteworthy for the sheer size of the tax at stake, estimated to be £2.2 billion. But none of this appears to have swayed the Supreme Court’s decision.

It is a disappointment that the Supreme Court has not agreed to hear this case, as it raised an interesting question of how tax legislation should apply following a decision of the ECJ that such legislation is contrary to EC law. For the moment the decision appears to confirm the view that the Supreme Court will hear relatively few tax cases.

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