Government loses tax haven court battle

Government loses tax haven court battle

The government has lost a crucial court battle in its fight to prevent companies using European tax havens after a judge ruled that Vodafone does not have to pay extra corporation tax on a Luxembourg-based subsidiary.

The mobile phone company has been locked in a fight with HM Revenue and Customs for six years but today Mr Justice Edward Evans-Lombe ruled in the company's favour. HMRC has the right to appeal the decision.

Vodafone had already taken a £2.2bn provision for possible tax payments if it lost the case and the ruling is likely to be closely watched by many other major multinational businesses with overseas subsidiaries.

The case centres around the Controlled Foreign Companies (CFC) legislation introduced in 1988 to try to claw back tax from companies with overseas businesses.

Two years ago the European court of justice ruled in a case involving Cadbury Schweppes that the legislation is restrictive and can only be justified where subsidiaries are set up artificially to gain a tax advantage. Today's high court judgment relates to the question of the compatibility of the CFC legislation with EU law rather than the facts of the Vodafone case.

In his judgement Evans-Lombe said that as a result of the Cadbury ruling that no charge could be imposed on Vodafone, or any other company in the same position, under the 1988 legislation and parliament needs to rectify the situation with a new set of rules.

"In my judgement, the.....continued below

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CFC legislation must be disapplied so that, pending amending legislation or executive action, no charge can be imposed on a company such as Vodafone under the CFC legislation.

"It seems to me that all UK taxpayers, including Vodafone, were and are entitled to be told by legislation, of which the meaning is plain, what the tax consequences for them will be if they decide to incorporate a controlled foreign company in a (EU) member state."

Vodafone Investments Luxembourg Sarl (VIL) was set up in 2000 as a vehicle for the holding of investments following the acquisition of German telecoms company Mannesmann - which Vodafone bought eight years ago in what was at the time the largest hostile takeover in corporate history. It is resident for tax purposes in Luxembourg.

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