1. IFA: UK Branch Meeting Cadbury Schweppes: where are we now? Paul Davison 9 December 2010 To insert other ready-formatted pages: go to the insert menu/slides from files/ select ‘on-screen inserts.ppt’ Click the display button, then click the button on the right (marked with red below). Click on the slide(s) to insert then insert and close.

2. Cadbury Schweppes: where are we now?  Current context  ECJ decision: a refresher  Vodafone 2  What are “wholly artificial arrangements”?

3. Cadbury Schweppes: not a recent tax case?  ECJ decision in 2006  Both Cadbury Schweppes and Vodafone 2 now settled  Many others still with legacy CFC issues  CFC reform in 2012

4. Cadbury Schweppes: the ECJ decision Restriction? No breach Breach Appropriate and proportionate? Legitimate objective? No Yes

5. Vodafone 2: UK rules were compliant all along  What is the conforming interpretation? S 748 Cases where section 747(3) does not apply (1) No apportionment under section 747(3) falls to be made as regards an accounting period of a controlled foreign company if– … (f) the company is actually established in another member state of the EEA and carries on genuine economic activities there.  Is a conforming interpretation really possible?  Maybe not, but…  Would it matter anyway?  Maybe not, if disapplication is / would do the same thing...  …because disapplication would be on a case-by-case basis

6. Vodafone 2: extent of disapplication Thin Cap GLO  Interest paid to foreign related party…  …in excess of an arm’s length amount → Only apply to wholly artificial arrangements Lankhorst-Hohorst  Interest paid to foreign related party…  …in excess of an arm’s length amount  …where debt:equity exceeds 3:1 → Strike out completely

7. Vodafone 2: conclusion  We have to decide what the Cadbury Schweppes conditions mean…  … in particular the difference between  a “wholly artificial arrangement” that is “intended to escape the national tax normally payable”; and  an “actual establishment” that is “intended to carry on genuine economic activities in the host member state”

8. The Cadbury Schweppes conditions: what do they mean?  “Wholly artificial arrangements” "wholly artificial arrangements aimed at circumventing the application of the legislation of the member state concerned" "wholly artificial arrangements which do not reflect economic reality, with a view to escaping the tax normally due on the profits generated by activities carried out on national territory" "fictitious establishment not carrying out any genuine economic activity in the territory of the host member state"

9. The Cadbury Schweppes conditions: what do they mean?  “Actual establishment” and “genuine economic activities” "actual establishment of the company concerned in the host member state and the pursuit of genuine economic activity there" "the incorporation of a CFC reflects economic reality... That incorporation must correspond with an actual establishment intended to carry on genuine economic activities in the host member state"

10. The Cadbury Schweppes conditions: earlier cases Cadbury Schweppes Factortame EC Commission v UK Emsland- Stärke Re Eurofood IFSC Ltd Halifax Marks & Spencer ICI Lankhorst -Hohorst de Lasteyrie du Sallant X

11. Cadbury Schweppes: mixed activity companies UK EU OpCo UK Non-UK Trade Surplus funds Loans

12. Cadbury Schweppes: fat capitalisation EU UK EU Surrender of tax losses M&S EU UK After-the-fact payments transfer taxable income Oy AA EU UK EU Off-market transactions transfer taxable income SGI EU UK Excessive debt transfers taxable income to parent Thin Cap GLO UK EU Excessive equity transfers taxable income to subsidiary Fat cap? Debt Equity

13. © Freshfields Bruckhaus Deringer LLP 2010 This material is for general information only and is not intended to provide legal advice. LON13995937