It may be remembered that in 2006 the European Court of Justice decided that the Controlled Foreign Companies (CFC) rules cannot be applied to tax the profits of a foreign subsidiary where the CFC is actually established in the other Member State and carries on a genuine economic activity there. The fact that it may have done so for tax reasons is irrelevant. The CFC legislation can be applied only where the CFC is a wholly artificial arrangement intended to escape tax and where there is no genuine economic activity: Cadbury Schweppes Plc v HMRC (Case C-196/04).
The recent case of Vodafone 2 v HMRC (2008) EWHC 1569 seems to have taken this a stage further. The High Court have said that it is impossible to construe the CFC legislation in a way that enables it to comply with European Community law even in the absence of an establishment with genuine economic activity. There are no words in Section 748 Taxes Act 1988 that are capable of limiting the operation of the section in a way that would comply with Article 43 as explained in the Cadbury Schweppes judgment. The only way in which a limitation could properly be made would be by amending Section 748, not interpreting it. Accordingly, the CFC legislation cannot apply to charge a company such as Vodafone tax on the profits of its foreign subsidiaries in the absence of amending legislation or executive action. I guess that some of that will be with us before too long.