The
Chancellor
Introduction
- In March 2000
Vodafone
Group plc, one of
the
leading mobile telecommunications companies, acquired Mannesmann AG through its wholly owned subsidiary
Vodafone 2
Ltd ("
V2
"), a company incorporated and resident in England.
For
that purpose a company incorporated and resident in Luxembourg,
Vodafone
Investments Luxembourg SARL ("VIL"), was interposed between
V2
and Mannesmann as
the
wholly owned subsidiary of
the
former to hold
the
shares in
the
latter and other European telecommunication companies. In
the
accounting period ended 31st March 2001 VIL derived substantial income from its various assets and, no doubt, accounted
for
it to
the
tax authorities in Luxembourg.
- In November 2002 HMRC gave notice to
V2
of its intention to enquire into its tax return
for
that accounting period and sought further information designed to entitle it to assess
V2
to tax in
the
United Kingdom on
the
income of VIL, giving credit
for the
tax paid by VIL in Luxembourg.
The
statutory basis
for
such an assessment is contained in
the
Controlled Foreign Companies ("CFC") legislation in Chapter IV of Part XVII of
the
Income and Corporation Taxes Act 1988 ("ICTA").
V2
contended that such legislation, to which I shall refer in some detail later, did not apply
for
a number of reasons, one of which was that
the
imposition of UK tax on
V2
in respect of
the
profits of VIL would constitute an unlawful restriction on
V2
's freedom of establishment conferred by Art 43 EC. Its request
for
a closure notice was refused and it appealed to
the
Special
Commissioners
.
- By then
the
same issue had arisen between Cadbury Schweppes plc and HMRC in respect of which, on 29th April 2004,
the
Special
Commissioners
had referred various questions to
the
European Court of Justice ("ECJ"). In
the
event
the
judgment of
the
ECJ in respect of that reference, given on 12th September 2006 (see [2006] ECR I-7995 ("Cadbury Schweppes")), rendered a similar reference made by
the
Special
Commissioners
in
the
appeal of
V2
redundant. Accordingly it is unnecessary to refer to
the
various appeals and applications in
the
appeal of
V2
before
the
substantive hearing before
the
Special
Commissioners
(John Walters QC and Theodore Wallace) in March 2007.
The
issue with which
the
Special
Commissioners
were then concerned relevant to this appeal was whether
the
CFC Legislation could be interpreted, as required by s.
2
(4) European Communities Act 1972, in a manner which did not unlawfully restrict
V2
's freedom of establishment, as declared by
the
ECJ in Cadbury Schweppes. One of them, Mr Walters QC, thought that it could;
the
other of them, Mr Wallace, concluded that it could not. As
the
former was in
the
chair he was entitled to a second or casting vote and his view prevailed.
V2
's appeal to
the
High Court came before Evans-Lombe J. He agreed with
the
view of Mr Wallace. He held that it is not possible to interpret
the
CFC Legislation so as to conform to
the
freedom of establishment of
V2
under Article 43 EC as declared by
the
ECJ in Cadbury Schweppes. In those circumstances he "disapplied
the
CFC Legislation as contrary to Community Law". This is
the
appeal of HMRC from
the
order of Evans-Lombe J. It is common ground that
the
freedom of establishment of
V2
under Art 43 EC, as declared in Cadbury Schweppes, is of direct effect and that, pursuant to s.
2
European Communities Act 1972,
the
CFC Legislation must be either construed or, if that is not possible, 'disapplied' so as not unlawfully to restrict that freedom. Thus there are two issues:
(1) Is it possible to interpret
the
CFC Legislation so as not unlawfully to restrict
V2
's freedom of establishment? And if not
(
2
) To what extent (and in what manner) should it be 'disapplied'?
I will deal with those two issues in due course. First it is necessary to describe in some detail
the
CFC Legislation,
the
conclusions of
the
ECJ in Cadbury Schweppes and
the
consequences of that conclusion.
The
CFC Legislation
- Part XVII of ICTA is headed "Tax Avoidance". Chapter IV of that part contains
the
CFC Legislation. As provided by s.747
the
Chapter applies:
"(1) If in any accounting period a company-
(a) is resident outside
the
United Kingdom, and
(b) is controlled by persons resident in
the
United Kingdom, and
(c) is subject to a lower level of taxation in
the
territory in which it is resident,"

The
concept of residence is expanded in s.749, control in s.747(1A) and territories with a lower level of taxation in s.750. Such a company is defined in s.747(
2
) as a controlled foreign company ("CFC"). It is not disputed,
for the
purposes of this appeal at least, that VIL is such a company and is controlled by
V2
.
- If
the
Chapter applies
the
consequence is that under s.747(3) HMRC is entitled to apportion
the
chargeable profits of
the
CFC and
the
tax paid in
the
lower tax territory to all those who are interested in
the
CFC, whether resident in
the
UK or not, in accordance with
the
provisions of s.752. It is not disputed that
V2
is interested in VIL
for the
purposes of any such apportionment. S.747(4) imposes a charge to a sum equal to corporation tax at
the
appropriate rate on such apportioned chargeable profits but gives credit
for the
tax on those profits paid in
the
lower tax territory. But
the
ability to apportion and consequently
the
liability to tax are "Subject to section 748...".
- S.748 is headed "Cases where s.747(3) does not apply. S.748(1) provides:
"No apportionment under section 747(3) falls to be made as regards an accounting period of a controlled foreign company if –"
There follow in paragraphs (a) to (e) a series of exceptions. They relate to
the
CFC and may be summarised as those CFCs as pursue (a) an acceptable distribution policy, (b) engage in exempt activities, (c) satisfy a public quotation condition, (d) make profits of less than £50,000 or (e) are resident in a territory specified in regulations to be made by HMRC subject to any conditions HMRC might specify.
The
exceptions specified in paragraphs (a), (b) and (c) are further elaborated in
the
applicable parts of Schedule 25. It is clear that these exceptions are not mutually exclusive.
The
exception in paragraph (d) is self-explanatory. With regard to
the
exception in paragraph (e) regulations were made by HMRC in December 1998 entitled Controlled Foreign Companies (Excluded Countries) Regulations 1998/3081.
The
schedule to
the
regulations has two lists of specified territories.
The
other conditions to be satisfied in order to be entitled to
the
benefit of this exception differ according to which list
the
territory falls in to. A number of member states of
the
EU come within
the
first list. Luxembourg and other member states fall within
the
second but
the
relevant conditions are not satisfied by VIL.
- Section 748(3) confers a further exception in these terms:
"(3) Notwithstanding that none of paragraphs (a) to (e) of subsection (1) above applies to an accounting period of a controlled foreign company, no apportionment under section 747(3) falls to be made as regards that accounting period if it is
the
case that –
(a) in so far as any of
the
transactions
the
results of which are reflected in
the
profits arising in that accounting period, or any two or more transactions taken together,
the
results of at least one of which are so reflected, achieved a reduction in United Kingdom tax, either
the
reduction so achieved was minimal or it was not
the
main purpose or one of
the
main purposes of
the
transaction or, as
the
case may be, of those transactions taken together to achieve that reduction; and
(b) it was not
the
main reason, or, as
the
case may be, one of
the
main reasons
for the
company's existence in that accounting period to achieve a reduction in United Kingdom tax by a diversion of profits from
the
United Kingdom."
Thus
the
exception conferred by s.748(3) differs from those contained in subsection (1) paragraphs (a)-(e) in that it depends on
the
subjective intention behind
the
relevant transactions or
the
existence of
the
CFC, not
the
objective existence of specific circumstances.
Cadbury Schweppes
- In view of
the
submissions made to us it is necessary to set out
the
facts,
the
opinion of
the
Advocate-General and
the
judgment of
the
ECJ in some detail. Cadbury Schweppes Overseas Ltd (CSO) was a wholly owned subsidiary of Cadbury Schweppes plc and
the
holding company of, amongst others, Cadbury Schweppes Treasury Services Ltd ("CSTS") and Cadbury Schweppes Treasury Services International Ltd ("CSTI"). Those subsidiaries had been incorporated and were resident in
the
Republic of Ireland. HMRC sought to apportion
the
chargeable profits of CSTS and CSTI to their parent company CSO and to charge
the
latter with corporation tax thereon, giving credit
for the
lower rate of tax payable in
the
Republic. CSO disputed
the
right of HMRC to do so and appealed to
the
Special
Commissioners
on
the
ground, amongst others, that
the
CFC Legislation is contrary to
the
freedom of establishment laid down in Article 43 EC.
The
Special
Commissioners
referred to
the
ECJ
the
question:
"Do Articles 43 [EC]....preclude national legislation such as that in issue in
the
main proceedings, which provides in specified circumstances
for the
imposition of a charge upon a company resident in that Member State in respect of
the
profits of a subsidiary company resident in another Member State and subject to a lower level of taxation?"
The
Advocate-General (M.Léger) considered this question under three headings, namely "A. Abuse of freedom of establishment" (paragraphs 39 to 61), "B. Hindrance to freedom of establishment" (paragraphs 62 to 84) and "C. Justification relating to counteraction of tax avoidance" (paragraphs 85 to 150). Under
the
first heading he concluded in paragraph 60
for the
reasons examined in detail in earlier paragraphs of that part that:
"I therefore find that
the
establishment by a company which is resident
for
tax purposes in a Member State of a subsidiary in
the
International Financial Services Centre
for the
avowed purpose of enjoying
the
more favourable tax regime applicable there does not, in itself, constitute an abuse of freedom of establishment."
- In relation to
the
second heading
the
Advocate-General considered in some detail
the
submissions made by a number of Member States and concluded in paragraph 83:
"
The
difference in treatment provided
for
by
the
United Kingdom legislation on CFCs depending on
the
tax rate of
the
Member State of establishment suffices, in my opinion,
for
that system to be regarded as constituting a hindrance to freedom of establishment, so that its compatibility with
the
rules of
the
Treaty must necessarily be subject to review by
the
Court."
The
Advocate-General then turned to consider
the
third heading under which he was determining how
the
question posed by
the
Special
Commissioners
should be answered by
the
ECJ. He started by pointing out (paragraph 89) that
the
case law of
the
ECJ lays down that Member States' legislation restrictive of freedoms conferred by amongst others Article 43 EC cannot be justified as
the
counteraction of tax avoidance if it "applies to a situation which is defined too generally". Thus (paragraph 92):
"It follows that, in order to be capable of being justified by counteraction of tax avoidance, national legislation must not merely refer to a given situation in general terms but must enable
the
national court to refuse, case by case,
the
benefit of Community law to certain taxpayers or certain companies which have made use of an artificial arrangement
for the
purpose of avoiding tax."
He then considered three grounds advanced as justifying
the
CFC Legislation in Marks & Spencer [2005] ECR I-10837 and other criteria advanced by
the
UK Government and
the
Commission.
- In paragraph 122
the
Advocate-General turned to consider whether
the
CFC Legislation is "suitable
for
counteracting tax avoidance or whether it goes beyond what is necessary
for
that purpose". He referred to
the
exemptions conferred by s.748(1) in paragraph 128 and 132 and to that conferred by s.748(3) in paragraphs 128 to 131. He considered that only
the
motive test allowed by s.748(3) permitted
the
national authorities to take account of
the
circumstances of each taxpayer and was, thus, not too general. He concluded in paragraph 150:
"At this stage I am of
the
opinion that it is
for the
national court, which has
the
task of determining
the
compatibility with Community law of its national law on CFCs, to assess whether
the
motive test may be given an interpretation which makes it possible to limit
the
application of that law to artificial arrangements intended to circumvent national tax law."
- He considered that
the
answer to
the
question posed by
the
Special
Commissioners
should be answered by
the
ECJ as follows:
"Articles 43 EC and 48 EC do not preclude national tax legislation which provides
for
inclusion in
the
tax base of a resident parent company profits of a controlled foreign company established in another Member State where those profits are subject in that State to a much lower level of taxation than that in effect in
the
State of residence of
the
parent company, if that legislation applies only to wholly artificial arrangements intended to circumvent national law. Such legislation must therefore enable
the
taxpayer to be exempted by providing proof that
the
controlled subsidiary is genuinely established in
the
State of establishment and that
the
transactions which have resulted in a reduction in
the
taxation of
the
parent company reflect services which were actually carried out in that State and were not devoid of economic purpose with regard to that company's activities."
Thus
the
Advocate-General regarded "wholly artificial arrangements intended to circumvent national law" as
the
opposite of companies "genuinely established in
the
State of establishment" and "transactions which have resulted in a reduction in
the
taxation of
the
parent company and reflect services which were actually carried out in that State and were not devoid of economic purpose with regard to that company's activities".
The
judgment of
the
ECJ set out
the
basic structure of
the
CFC Legislation in paragraphs 3 to 12,
the
underlying facts in paragraphs 13 to 27 and
the
question referred by
the
Special
Commissioners
in paragraph 28. In paragraphs 31 to 38
the
ECJ considered whether there had been an abuse of
the
freedoms conferred by
the
EC Treaty. They concluded:
"37. As to freedom of establishment,
the
Court has already held that
the
fact that
the
company was established in a Member State
for the
purpose of benefiting from more favourable legislation does not in itself suffice to constitute abuse of that freedom (see, to that effect, Centros, paragraph 27, and Case C-167/01 Inspire Art [2003] ECR I-10155, paragraph 96).
38. .....it follows that
the
fact that in this case CS decided to establish CSTS and CSTI in
the
IFSC
for the
avowed purpose of benefiting from
the
favourable tax regime which that establishment enjoys does not in itself constitute abuse. That fact does not therefore preclude reliance by CS on Articles 43 EC and 48 EC (see, to that effect, Centros, paragraph 18, and Inspire Art, paragraph 98).
- In those circumstances
the
ECJ proceeded to consider whether Articles 43 and 48 precluded legislation such as
the
CFC Legislation as a restriction on freedom of establishment. They concluded (paragraph 46) that it did because:
"...
the
separate tax treatment under
the
legislation on CFCs and
the
resulting disadvantage
for
resident companies which have a subsidiary subject, in another Member State, to a lower level of taxation are such as to hinder
the
exercise of freedom of establishment by such companies, dissuading them from establishing, acquiring or maintaining a subsidiary in a Member State in which
the
latter is subject to such a level of taxation."

The
ECJ then considered whether
the
restriction was justified.
- They considered that
the
advantage derived from incorporating a subsidiary in a low tax territory could not of itself provide justification
for
a higher tax burden on
the
parent (paragraph 49); nor could
the
mere fact of
the
setting up of such a subsidiary justify any presumption of tax evasion (paragraph 50). On
the
other hand (paragraph 51) a measure specifically relating to "wholly artificial arrangements aimed at circumventing
the
legislation of
the
Member State concerned" might be justified.
The
ECJ then considered what
the
freedom of establishment conferred by Article 43 entailed and concluded that (paragraphs 54 and 55):
54......Consequently, it presupposes actual establishment of
the
company concerned in
the
host Member State and
the
pursuit of genuine economic activity there.
55. It follows that, in order
for
a restriction on
the
freedom of establishment to be justified on
the
ground of prevention of abusive practices,
the
specific objective of such a restriction must be to prevent conduct involving
the
creation of 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."
The
ECJ then considered
the
essential elements of
the
CFC Legislation to determine whether it is justified "on
the
ground of prevention of wholly artificial arrangements and, if so, whether it is proportionate in relation to that objective" and whether it went further than what is necessary to achieve that purpose. In that connection they referred (paragraphs 61 and 62) to
the
exceptions. They rejected them as providing sufficient justification because (paragraphs 63 and 64):
"63....
the
fact that none of
the
exceptions provided
for
by
the
legislation on CFCs applies and that
the
intention to obtain tax relief prompted
the
incorporation of
the
CFC and
the
conclusion of
the
transactions between
the
latter and
the
resident company does not suffice to conclude that there is a wholly artificial arrangement intended solely to escape that tax.
64 In order to find that there is such an arrangement there must be, in addition to a subjective element consisting in
the
intention to obtain a tax advantage, objective circumstances showing that, despite formal observance of
the
conditions laid down by Community law,
the
objective pursued by freedom of establishment, as set out in paragraphs 54 and 55 of this judgment, has not been achieved (see, to that effect, Case C-110/99 Emsland-Stärke [2000] ECR I-11569, paragraphs 52 and 53, and Case C-255/02 Halifax and Others [2006] ECR I-1609, paragraphs 74 and 75)."
The
ECJ then turned to what those objective circumstances are. They concluded that, in summary, they are that
the
incorporation of
the
CFC reflects an economic reality (paragraph 65), that it is intended that
the
CFC shall carry on genuine economic activities (paragraph 66) and that those factors can be objectively ascertained (paragraph 67). But:
"If checking those factors leads to
the
finding that
the
CFC is a fictitious establishment not carrying out any genuine economic activity in
the
territory of
the
host Member State,
the
creation of that CFC must be regarded as having
the
characteristics of a wholly artificial arrangement. That could be so in particular in
the
case of a 'letterbox' or 'front' subsidiary (see Case C-341/04 Eurofood IFSC [2006] ECR I-3813, paragraphs 34 and 35)."
The
ECJ concluded (paragraphs 72 to 74):
"72. In this case, it is
for the
national court to determine whether, as maintained by
the
United Kingdom Government,
the
motive test, as defined by
the
legislation on CFCs, lends itself to an interpretation which enables
the
taxation provided
for
by that legislation to be restricted to wholly artificial arrangements or whether, on
the
contrary,
the
criteria on which that test is based mean that, where none of
the
exceptions laid down by that legislation applies and
the
intention to obtain a reduction in United Kingdom tax is central to
the
reasons
for
incorporating
the
CFC,
the
resident parent company comes within
the
scope of application of that legislation, despite
the
absence of objective evidence such as to indicate
the
existence of an arrangement of that nature.
73. In
the
first case,
the
legislation on CFCs should be regarded as being compatible with Articles 43 EC and 48 EC.
74. In
the
second case, on
the
other hand,
the
view should be taken, as submitted by
the
applicants in
the
main proceedings,
the
Commission and, at
the
hearing,
the
Cypriot Government, that that legislation is contrary to Articles 43 EC and 48 EC."
- In those circumstances
the
ECJ ruled in response to
the
question referred by
the
Special
Commissioners
that:
"Articles 43 EC and 48 EC must be interpreted as precluding
the
inclusion in
the
tax base of a resident company established in a Member State of profits made by a controlled foreign company in another Member State, where those profits are subject in that State to a lower level of taxation than that applicable in
the
first State, unless such inclusion relates only to wholly artificial arrangements intended to escape
the
national tax normally payable. Accordingly, such a tax measure must not be applied where it is proven, on
the
basis of objective factors which are ascertainable by third parties, that despite
the
existence of tax motives that controlled company is actually established in
the
host Member State and carries on genuine economic activities there."
The
Consequences of Cadbury Schweppes
- In
the
instant case
the
Special
Commissioners
concluded from their review of Cadbury Schweppes (paragraph 33) that
the
guidance given by
the
ECJ in that case is that:
"....
the
CFC legislation itself introduces a restriction on freedom of establishment which can be justified on
the
basis that it enables
the
United Kingdom to "thwart practices which have no purpose other than to escape tax normally due on
the
profits generated by activities carried on in national territory" (
the
United Kingdom).
The
restriction must however be proportionate to
the
achievement of that objective.
The
CFC legislation is proportionate in relation to that objective if and to
the
extent that it confines
the
restriction to wholly artificial arrangements intended to escape
the
United Kingdom tax normally payable - such wholly artificial arrangements being arrangements in relation to which, in addition to there being a subjective element consisting in
the
intention to obtain a tax advantage,
the
resident company has not proved, on
the
basis of objective factors which are ascertainable by third parties, that
the
CFC is actually established in
the
host Member State and carries on genuine economic activities there."
Evans-Lombe J accepted that summary as accurate and adopted it. Neither party to this appeal has criticised it.
- It follows, and was not disputed, that
the
consequence of
the
decision in Cadbury Schweppes is that there is a conflict between
the
freedom of establishment conferred on
V2
by Article 43 EC and
the
prima facie entitlement of HMRC under
the
CFC Legislation to tax
V2
on
the
profits of VIL. That conflict must be resolved in accordance with
the
provisions of s.
2
European Communities Act 1972. It is not disputed that
the
freedom of establishment conferred on
V2
by Article 43 EC is an enforceable Community right within subsection (1) to be given legal effect without further enactment. Likewise it is not disputed that in accordance with subsection (4)
the
CFC Legislation "shall be construed and have effect subject to" that right.
- Accordingly
the
first issue relates to such 'construction' and
the
second to such 'effect'. I shall refer to
the
principles applicable to such construction in relation to
the
first issue. If such a construction is impossible
the
process by which effect is given to
the
enforceable community right is described as 'disapplication'. Disapplication involves treating
the
relevant provision in
the
CFC Legislation as if it were expressed to be "without prejudice to"
V2
's freedom of establishment, see Factortame Ltd
v
Secretary of State
for
Transport [1990]
2
AC 85, 140 and Fleming/Conde Nast
v
HMRC [2008] 1 WLR 195 para 24.
- HMRC contends that on either construction or disapplication it is entitled to maintain its enquiry into
the
tax return submitted by
V2
in relation to
the
accounting period ended 31st March 2001. By contrast
V2
maintains that not only is it impossible to construe
the
CFC Legislation as HMRC contends but its disapplication would necessarily deprive
the
enquiry into its tax return of any legitimate purpose.
Interpretation
The
Special
Commissioners
had to decide whether
the
guidance provided by Cadbury Schweppes required them to consider
the
interpretation of only
the
motive test in s.748(3) or of
the
CFC Legislation as a whole. After considering Cadbury Schweppes in detail they concluded (paragraph 36) that they should consider
the
motive test alone. They then considered
the
principles of conforming interpretation and decided (paragraph 60) that s.
2
European Communities Act 1972 required them to construe
the
motive test if and insofar as possible in conformity with Cadbury Schweppes. As I have already indicated they did not agree on this issue.
- Mr Walters considered that s.748(3) should be interpreted as if it provided, as alternative to (a) and (b), a second condition to
the
effect that:
"..there will be no such apportionment (despite
the
presence of an intention to obtain a tax advantage) if there are also objective circumstances showing that
the
objective pursued by freedom of establishment in Community law has been achieved and
the
establishment of
the
CFC reflects economic reality (cf.
the
judgment in Cadbury Schweppes, at paragraph 55). This second, alternative, condition would specifically relate to wholly artificial arrangements (or to
the
absence of them) and would, in effect, ensure that
the
motive test, as defined by
the
CFC legislation, would be applied without prejudice to
the
directly enforceable Community rights of companies established in
the
Community…"
- Mr Wallace did not agree as he did not see how
the
motive test could be interpreted as restricted to wholly artificial transactions. He concluded (paragraph 80) that:
"…
the
motive test is not amenable to a conforming interpretation such as would confine its application to wholly artificial arrangements. This is because
the
criteria on which
the
motive test is based mean that, where none of
the
exceptions laid down by
the
CFC legislation applies and
the
intention to obtain a reduction in United Kingdom tax is central to
the
reasons
for
incorporating
the
CFC,
the
resident parent company comes within
the
scope of application of that legislation, even where there is no objective evidence such as to indicate
the
existence of a wholly artificial arrangement…"
- On appeal, Evans-Lombe J described (paragraph 34)
the
principal issue before him as being whether it is possible to construe Sections 747 and 748 of ICTA so that
the
charge to tax resulting from Section 747(3) is limited in its application to
the
profits of CFCs resident in Member States which are not bona fide "established" in those Member States. In paragraphs 36 to 73 of his judgment he limited consideration of that question to
the
motive test in s.748(3). His conclusion in that respect was that it was impossible to construe s.748(3) so as to make it conform to
the
right of establishment under article 43 EC. In paragraphs 74 to 79 Evans-Lombe J considered similar arguments directed to
the
definition of 'chargeable profits' in s.747(6)(a) and 'exempt activities' dealt with in s.748(1)(b) and Part II of Schedule 25 and arrived at
the
same conclusions.
The
first issue
for
our determination is to ascertain which part or parts of
the
CFC Legislation is or are open to a conforming interpretation. Counsel
for V2
submits that only
the
motive test contained in s.748(3) may be considered in that context. He bases this submission on passages in
the
opinion of
the
Advocate-General and in
the
judgment of
the
ECJ in Cadbury Schweppes.
The
passages in
the
opinion of
the
Advocate-General relied on are those to which I have referred in paragraphs 13 to 15 above.
The
passages in
the
judgment of
the
Court are those to which I have referred in paragraphs 20 to
22
above. Counsel relies, in particular, on paragraph 72 of
the
judgment of
the
court where
the
ECJ stated:
"In this case, it is
for the
national court to determine whether, as maintained by
the
United Kingdom Government,
the
motive test, as defined by
the
legislation on CFCs, lends itself to an interpretation which enables
the
taxation provided
for
by that legislation to be restricted to wholly artificial arrangements..."
- Counsel
for V2
submits that this explicit reference to
the
motive test is explained in
the
passages in
the
opinion of
the
Advocate-General relied on, namely
the
need
for
case by case consideration. He contends that
the
national courts are bound by
the
statement of
the
ECJ in paragraph 72 only to consider
the
motive test.
- I do not accept that submission.
The
jurisdiction of
the
ECJ to give preliminary rulings relates to
the
interpretation of
the
EC Treaty and
the
other matters referred to in Article 234 EC. They do not include
the
interpretation of
the
legislation of a Member State, see Pfeiffer
v
Deutsches Rotes Kreuz [2004] ECR I-8835 para 115 and Criminal Proceedings against Pupino [2005] ECR I-5285 para 47. Further, as those citations show,
the
obligation of
the
national court is to examine
the
whole of
the
national law to consider how far it may be applied so as to conform to enforceable Community rights.
- Moreover all
the
passages on which counsel
for V2
relied come within
the
sections of
the
opinion of
the
Advocate-General and of
the
judgment of
the
ECJ dealing with justification. It may be that if
the
only question is justification of
the
CFC Legislation as it stands
the
best candidate is
the
motive test in s.748(3). But that cannot be
the
only consideration. Conformity of
the
CFC Legislation to
the
freedom of establishment
for
which article 43 EC provides might just as well be provided by an interpretation which removed
the
hindrance to which
the
Advocate-General referred in Part B of his opinion or
the
restriction referred to by
the
ECJ in
the
passages to which I have referred in paragraphs 18 and 19 above. That may require consideration of
the
CFC Legislation as a whole.
- Finally
the
limitation expressed in paragraph 72 of
the
judgment of
the
ECJ to
the
motive test in s.748(3) seems to have arisen from
the
submissions made to
the
ECJ by
the
UK. We were not referred to any authority
for the
proposition that a party, even if it is an emanation of
the
Member State, is limited in
the
proceedings in which
the
reference is made to
the
submissions made to
the
ECJ on
the
reference by a member state. In my view,
the
Special
Commissioners
were wrong to conclude that their consideration of a conforming interpretation was limited to
the
motive test in s.748(3). This court is entitled and bound to consider all parts of
the
CFC Legislation in ascertaining whether it is amenable to a conforming interpretation.
- We were referred in
the
parties' respective written arguments and orally to a number of reported cases on
the
principles to be observed in looking
for
a conforming interpretation in either
the
European Community or Human Rights contexts. In chronological order they are Pickstone
v
Freemans [1989] AC 66; Marleasing SA
v
La Comercial Internacional de Alimentacion SA [1990] ECR I-4135; Litster
v
Forth Dry Dock [1990] AC 546; ICI
v
Colmer [1999] 1 WLR 2035; Ghaidan
v
Godin-Mendoza [2004]
2
AC 557; HMRC
v
IDT Card Services Ireland Ltd [2006] STC 1252; HMRC
v
EB Central Services Ltd [2008] EWCA Civ 486 and Fleming/Conde Nast
v
HMRC [2008] 1 WLR 195.
The
principles which those cases established or illustrated were helpfully summarised by counsel
for
HMRC in terms from which counsel
for V2
did not dissent. Such principles are that:
"In summary,
the
obligation on
the
English courts to construe domestic legislation consistently with Community law obligations is both broad and far-reaching. In particular:
(a) It is not constrained by conventional rules of construction (Per Lord Oliver in Pickstone at 126B);
(b) It does not require ambiguity in
the
legislative language (Per Lord Oliver in Pickstone at 126B; Lord Nicholls in Ghaidan at 32);
(c) It is not an exercise in semantics or linguistics (See Ghaidan per Lord Nicholls at 31 and 35; Lord Steyn at 48-49; Lord Rodger at 110-115);
(d) It permits departure from
the
strict and literal application of
the
words which
the
legislature has elected to use (Per Lord Oliver in Litster at 577A; Lord Nicholls in Ghaidan at 31);
(e) It permits
the
implication of words necessary to comply with Community law obligations (Per Lord Templeman in Pickstone at 120H-121A; Lord Oliver in Litster at 577A); and
(f)
The
precise form of
the
words to be implied does not matter (Per Lord Keith in Pickstone at 112D; Lord Rodger in Ghaidan at para 122; Arden LJ in IDT Card Services at 114)."
- Counsel
for
HMRC went on to point out, again without dissent from counsel
for V2
, that:
"
The
only constraints on
the
broad and far-reaching nature of
the
interpretative obligation are that:
(a)
The
meaning should "go with
the
grain of
the
legislation" and be "compatible with
the
underlying thrust of
the
legislation being construed." (Per Lord Nicholls in Ghaidan at 33; Dyson LJ in EB Central Services at 81) An interpretation should not be adopted which is inconsistent with a fundamental or cardinal feature of
the
legislation since this would cross
the
boundary between interpretation and amendment; (See Ghaidan per Lord Nicholls at 33; Lord Rodger at 110-113; Arden LJ in IDT Card Services at 82 and 113) and
(b)
The
exercise of
the
interpretative obligation cannot require
the
courts to make decisions
for
which they are not equipped or give rise to important practical repercussions which
the
court is not equipped to evaluate. (See Ghaidan per Lord Nicholls at 33; Lord Rodger at 115; Arden L in IDT Card Services at 113.)"
- Without in any way suggesting that it is incumbent on he who contends
for
a conforming interpretation to spell out exactly what it is,
for
that would be to gainsay
the
proposition set out in paragraph 37(f), it undoubtedly assists in
the
consideration of whether or not it is a permissible interpretation to see on paper how it is suggested that it would be effected, whether by interpolation, deletion, rewording or otherwise. Counsel
for
HMRC disclaimed any intention or requirement to produce any precise formulation. He contended that
the
'grain' or 'thrust' of
the
legislation was to cast
the
initial net wide as in s.747(3) and then narrow it by
the
overlapping exceptions set out in s.748(1)(a) to (e) and (3). In that context, he submits, all that is required is to introduce an additional exception in respect of a controlled foreign company
"if it is, in that accounting period, actually established in another member state of
the
EEA and carries on genuine economic activities there."
Such an exception could be an additional lettered paragraph in s.748(1) or an additional alternative in s.748(3) as suggested by Mr Walters.
The
effect of such an amendment would be to remove from
the
CFC Legislation
the
'hindrance' or 'restriction' with which
the
Advocate-General and
the
ECJ were concerned in Cadbury Schweppes. In that event there would be no need
for the
case by case consideration which was considered to be necessary if
the
CFC Legislation was to be justified as it stood. Were it considered desirable it would be simple to provide
for
an exception to
the
exception in relation to "wholly artificial transactions".
- These submissions are opposed by counsel
for V2
. He makes three basic submissions: (1) such an interpretation would not conform with
the
scheme and essentials of
the
CFC Legislation, (
2
) such an interpretation would create two regimes, one
for
controlled foreign companies established within
the
EEA and another
for
those established elsewhere contrary to
the
decision of
the
House of Lords in ICI
v
Colmer [1999] 1 WLR 2035, and (3) any such interpretation would be retrospective in its operation, involve legal or economic policy decisions and would fail to satisfy
the
test of legal certainty.
- In relation to
the
first submission counsel submits that
the
result of such an interpretation as counsel
for
HMRC advances would be to render
the
CFC Legislation inapplicable to all those companies who comply with its terms in flat contradiction to
the
evident purpose of
the
legislation as it stands that it should apply to all companies wherever established which are not entitled to one or more of
the
present exceptions. He submits that such an outcome would be inconsistent with views of Lord Rodger of Earlsferry in Ghaidan para 110 where he said:
"[s.3 Human Rights Act 1998] does not allow
the
courts to change
the
substance of a provision completely, to change a provision from one where Parliament says that x is to happen into one saying that x is not to happen. And, of course, in considering what constitutes
the
substance of
the
provision or provisions under consideration, it is necessary to have regard to their place in
the
overall scheme of
the
legislation as enacted by Parliament."
That was said in relation to
the
provisions of s.3 Human Rights Act 1998.
The
terms of that section are in substance
the
same as
the
terms of s.
2
(4) ECA 1972 although
the
consequence of an inability to find a conforming interpretation is a declaration of incompatibility not disapplication in
the
manner I have explained.
The
issue in and outcome of Ghaidan has to be considered in order to appreciate what Lord Rodger meant by "x".
The
issue was whether
the
survivor of a homosexual partnership was entitled to succeed to a protected tenancy of which
the
other partner was
the
tenant.
The
right of succession was conferred by para
2
of Schedule 1 to
the
Rent Act 1977 on
the
'spouse' of
the
tenant. By further definition
the
word spouse was enlarged to include a person who was living with
the
tenant "as his or
her
wife or husband". It had been held that
the
limitation of
the
right of succession to heterosexual partnerships infringed
the
defendant's rights under articles 8 and 15 of
the
ECHR as constituting discrimination on grounds of sex.
The
question then arose whether in accordance with s.3 HRA it was possible to give
the
Rent Acts a meaning which was compatible with
the
defendant's human rights.
The
House of Lords (Lord Millett dissenting) concluded that it was.
The
extension of
the
right of succession to
the
defendant did not affect its availability to those on whom it had been conferred by
the
express terms of
the
Rent Acts.
- Further
the
nature of
the
interpretation referred to in paragraph 39 above is no more incompatible with
the
original legislation than that which found favour with
the
Court of Appeal in HMRC
v
IDT Card Services Ireland Ltd [2006] STC 1252. That case concerned
the
treatment of credit vouchers
for the
purposes of VAT.
The
relevant statutory provision, para 3(
2
), required
the
face value of a credit voucher to be disregarded in relation to a supply. Paragraph 3(3) provided
for
that disregard not to apply if
the
person who supplied
the
goods
for
which
the
voucher was used failed to account
for the
relevant VAT. On
the
face of it paragraph 3(
2
) would exempt phone cards issued in
the
Republic of Eire altogether which would be inconsistent with
the
Sixth Directive.
The
Court of Appeal interpreted
the
provisions of Paragraph 3(3) as extending to cases such as that in which
the
effect of Paragraph 3(
2
) would result in
the
non-taxation of
the
relevant supply.
The
extension of paragraph 3(3) to cases to which it did not, if construed in accordance with normal domestic rules of statutory interpretation, apply gave rise to a liability to tax where none existed.
- To my mind
the
extension of
the
exceptions to
the
CFC Legislation
for
which counsel
for
HMRC contends is as permissible as either of those which found favour in Ghaidan or IDT. It does not alter
the
impact on other CFCs which are not excepted by any other exception. Certainly it provides an additional exception but, as counsel
for
HMRC submitted,
the
grain or thrust of
the
legislation recognises that
the
wide net cast by s.747(3) is intended to be narrowed by s.748. Further
the
terms of various exceptions were not intended to be either mutually exclusive or immutable as
the
ability to amend
the
conditions contained in various parts of Schedule 25 and
the
terms of paragraph (e) show.
For
my part I would reject this objection to
the
conforming interpretation put forward by counsel
for
HMRC.
The
second objection summarised in paragraph 41 above is to
the
effect that
the
conforming interpretation advanced by HMRC involves
the
conversion of a single regime applicable to all subsidiaries wherever formed to two regimes, one applicable to subsidiaries established in
the
EEA and
the
other to subsidiaries established elsewhere. It is submitted that to do so is contrary to
the
judgment of
the
House of Lords in ICI
v
Colmer [1999] 1 WLR 2035.
- To explain this point it is necessary to trace
the
history of that case in some detail, which is more easily done by reference to
the
report of
the
case in all courts to be found in
the
Reports of Tax Cases (72 TC 1).
The
case concerned what was called 'consortium group relief' allowed by s.258 Income and Corporation Taxes Act 1970 (72 TC 6).
The
consortium consisted of ICI and Welcome Foundation Ltd. They held
the
issued shares of Cooper's Animal Health (Holdings) Ltd ("CAHH"). CAHH held
the
shares in 23 trading subsidiaries of which 4 were resident in
the
UK, 6 in other member states and 13 in non-EC Member States. One of
the
UK resident subsidiaries was Cooper's Animal Health Ltd ("CAH"). CAH made trading losses and sought to surrender them to ICI so that
the
latter might set them off against its profits.
The
question at issue was whether CAHH was a holding company within
the
definition contained in s.258(5)(b). That definition required its business to consist wholly or mainly in
the
holding of shares or securities of companies which were its 90% subsidiaries and were trading companies. Sub-section (7) added that
"References in this and
the
following sections of this Chapter to a company apply only to bodies corporate resident in
the
United Kingdom..."
The
Inland
Revenue
contended that this provision was not satisfied by CAHH because 19 of its subsidiaries were not resident in
the
UK. That argument prevailed before
the
Special
Commissioner
(72 TC 5). But a different view was taken by Millett J (72 TC 11) and
the
Court of Appeal (72 TC 15). Each of those courts considered that
the
residence requirement applied only to
the
companies seeking to surrender
the
losses and
the
company seeking to use them and had no application to
the
residence of
the
companies referred to in
the
definition of holding company.
The
Inland
Revenue
's appeal to
the
House of Lords first came on in late 1995. In their reserved judgment given in March 1996 Lord Nolan with whom
the
other members of
the
Appellate Committee agreed took a different view (72 TC 26). He considered (72 TC 35) that, but
for the
Community law point taken by ICI
for the
first time in
the
House of Lords,
the
argument of
the
Inland
Revenue
to
the
effect that subsection (7) applied to
the
definition of holding company as well as to
the
claimant and surrendering companies was to be preferred.
The
Community law point was to
the
effect that if that was
the
correct construction of
the
definition of holding company then it infringed
the
freedom of establishment conferred by Article 43 EC. In
the
event
the
House of Lords referred to
the
ECJ
the
questions whether their construction to
the
effect that subsection (7) applied to
the
definition of holding company infringed
the
freedom of establishment afforded by Article 43 EC, and, if so, whether such infringement could be justified (72 TC 39).
The
ECJ considered (72 TC 52 para [14]) that that question did not arise because on any view
the
majority of
the
holding companies of CAHH were resident outside
the
EU. But they went on to answer
the
questions referred. In respect of
the
first question
the
ECJ considered (72 TC 54 para [23]) that
the
unequal treatment involved in applying a residence test to
the
EU subsidiaries but not others engaged
the
freedom of establishment accorded by Article 43 EC but was not justified (72 TC 55 para [30]). They also dealt with a second question relating to
the
duty of
the
national court which is relevant to any question of disapplication but not conforming construction.
- When
the
appeal of
the
Inland
Revenue
returned to
the
House of Lords (72 TC 56) Lord Nolan, with whom
the
other members of
the
Appellate Committee agreed, noted that Community law presented no obstacle to
the
application of s.258(7) in accordance with
the
construction put upon it by
the
House of Lords in its previous decision (72 TC 59F). But counsel submitted that
the
answers of
the
ECJ rendered that construction unsustainable as a matter of domestic law because
the
provision was ambiguous and should be construed so as to conform to Community law. Lord Nolan held that there was no ambiguity. He continued:
"
The
second and more fundamental objection is that, while
the
construction adopted by
the
courts below would certainly avoid
the
difficulty raised by article 52, it can scarcely be described as conforming with
the
article, because it draws no distinction between companies resident within and those resident outside
the
Community. There is no way in which such a distinction can be read into
the
words used. It is impossible to construe section 258 as permitting a company such as Holdings to include in
the
head count non-United Kingdom resident subsidiaries which are established in other Community countries in conformity with article 52, but not to include those established outside
the
Community which are unprotected by Community law.
For
substantially
the
same reasons Mr. Whiteman`s argument that
the
doctrine of severance could be invoked to separate
the
permissible from
the
impermissible elements of section 258 cannot in my judgment succeed.
The
language of
the
crucial provisions is indivisible."
- In my view it is plain that when Lord Nolan referred to
the
fact that 'it' did not conform to Article 43 EC he was referring to
the
'domestic' construction of s.258(7) favoured by Millett J and
the
Court of Appeal to
the
effect that that subsection only applied to
the
companies claiming or surrendering
the
tax losses. It could not be a conforming interpretation in relation to
the
Community law point raised in
the
House of Lords because
the
definition of holding company remained as before without distinction between companies resident in
the
UK,
the
EU or elsewhere. In
the
second sentence Lord Nolan accepted that no such distinction could be read into
the
relevant subsection if
the
construction originally favoured by
the
House of Lords in 1996 was preferred. Accordingly
the
answers of
the
ECJ to
the
questions referred did not indicate any reason to prefer
the
construction favoured by either Millett J and
the
Court of Appeal on
the
one hand or
the
House of Lords on
the
other. Accordingly
the
House of Lords adhered to
the
construction they had originally favoured.
For
my part I do not consider that that decision assists
V2
. First,
the
need to construe a statutory provision compatibly with directly enforceable community rights did not arise in that case because on any view more than half CAHH's subsidiaries were resident outside
the
EEA. Second,
the
freedom of establishment of neither ICI nor CAH was affected either way. Third,
the
application of s.258(7) preferred by
the
House of Lords could not be split so as to divide
the
class of non-UK residents into those resident in a Member State and those resident elsewhere without substantially altering
the
availability of consortium loss relief
for
all who might seek it.
The
decision does not in my view establish
the
proposition
for
which counsel
for V2
contended, namely, that a geographically based distinction is always impossible.
- Returning to
the
circumstances of this case, it is plain that geographical distinctions are consistent with
the
grain of
the
CFC Legislation because,
for
example, s.748(1)(e) provides
for
exactly that distinction.
The
insertion of another such exception in s.748(1) on
the
lines suggested by counsel
for
HMRC would leave unaffected
the
impact of
the
CFC Legislation on those companies to which it continued to apply.
For
my part I would reject this objection to
the
conforming interpretation advanced by counsel
for
HMRC.
The
third objection summarised in paragraph 41 above is to
the
effect that
the
suggested conforming interpretation would be retrospective in operation, would involve legal or economic policy decisions and would fail to satisfy
the
test of legal certainty. Counsel
for V2
points out that a conforming interpretation necessarily applies retrospectively and in
the
tax field has to be applied by Inspectors of Taxes and taxpayers up and down
the
country. As such it must be sufficiently certain both from a practical and legal point of view. Counsel
for V2
contends that
the
conforming interpretation advanced by counsel
for
HMRC is not only insufficiently certain but has involved a decision on legal, economic and policy grounds which should be left to Parliament.
- There are a number of points wrapped up in that submission. I will take them in turn. First, it is inevitable that a conforming interpretation will be retrospective in its operation. Unless and until it is averred that
the
legislation is inconsistent with some enforceable Community right there is no occasion to consider a conforming interpretation.
The
fact that
the
effect of such an interpretation is felt retrospectively is no more an objection in
the
field of conforming interpretation than it is in
the
case of domestic statutory construction.
- Second, it is not a requirement of a conforming interpretation that it should be capable of precise formulation. That is precisely
the
point summarised in sub-paragraph (f) in paragraph 37 above.
The
dicta there referred to were made in such widely diverse situations as equal pay, right to succession of a protected tenancy and
the
imposition of a liability to VAT. It is inevitable that
the
conforming interpretation will lack
the
crispness to be expected of properly considered legislation; but, that cannot be a sufficient objection.
- Third,
the
conforming interpretation advanced by counsel
for
HMRC reflects and excepts from
the
operation of
the
CFC Legislation precisely that element of it which
the
ECJ held to constitute
the
hindrance to freedom of establishment. That is, by definition, sufficiently certain
for
a conforming interpretation whether or not
the
exclusion from
the
exception of wholly artificial transactions is included. There can be no objection to such an exclusion
for the
like reason. It follows precisely
the
formulation of
the
justification
for the
hindrance which
the
ECJ found to be acceptable.
- It is
the
case that there are likely to be other ways of achieving conformity,
for
example s.751A inserted into
the
CFC Legislation by
the
Finance Act 2007, and
the
choice of one rather than another may well involve policy decisions. But if that consideration alone could render a conforming interpretation illegitimate it would considerably restrict
the
occasions in which a conforming interpretation could be adopted and lead to an increase in disapplications.
The
choice of a conforming interpretation which faithfully follows a conclusion of
the
ECJ, as in this case, does not in my view trespass on
the
forbidden ground of legislation.
For
all these reasons I would reject
the
third objection advanced by counsel
for V2
in opposition to
the
conforming interpretation submitted by counsel
for
HMRC. Evans-Lombe J arrived at a different conclusion
for
, basically, two reasons. First,
the
conforming interpretation argued before him was limited to
the
motive test in s.748(3). There are obvious difficulties in seeking to graft on to a subjective test, such as that subsection contains,
the
objective test which
the
justification, which
the
ECJ considered to be essential, requires. Second,
the
nature of
the
conforming interpretation submitted by counsel
for
HMRC in this court is substantially different to that put before Evans-Lombe J.
The
conforming interpretation I would accept deals with
the
element of
the
CFC Legislation which provides
the
hindrance or restriction on freedom of establishment as opposed to
the
elements of justification
for
that hindrance or restriction on which
the
interpretation put before Evans-Lombe J concentrated.
For
all these reasons I would allow
the
appeal.
Disapplication
- If
the
other members of
the
court agree with my conclusion on conforming interpretation then
the
issue of disapplication does not arise. But in case they do not, and in deference to
the
arguments of counsel I should make brief reference to
the
arguments. By paragraph 4 of his order Evans-Lombe J ordered that
the
CFC Legislation "be disapplied as being contrary to Community law". It is common ground that such order cannot stand because it goes beyond
the
obligation of a member state and disapplies
the
CFC Legislation in situations falling outside
the
scope of Community law, see IRC
v
Colmer 72 TC 56 paras 34 and 35.
The
consequence of disapplication as referred to in paragraph 26 above is that it is necessary to identify those entitled to
the
community rights to be protected, see Autologic Holdings plc
v
IRC [2005] STC 1357, 1365 para 17 and Fleming/Conde Nast [2008] 1 WLR 195, 216 para 49. It was clear from
the
parties' written arguments that there was disagreement as to
the
extent and nature of
the
disapplication which would be appropriate. At our request
the
parties formulated what they submitted was
the
appropriate form of order on
the
assumption, in each case, that we had concluded that a conforming interpretation is impossible and on
the
further assumptions that their arguments on disapplication had or had not been accepted.
- Counsel
for the
HMRC submitted that no order
for
disapplication would be required but
the
consequence of our judgment would be that
the
enquiry into
the
tax return of
V2
would just continue. If that submission was not accepted it was suggested that
the
form of disapplication might be one of two alternative forms, namely:
A
"
The
CFC Legislation shall be disapplied in favour of
V2
insofar as it relates to VIL in respect of
the
accounting period ended 31st March 2001."
Or
B
"[As in
the
first alternative with
the
addition of] only where it is proven, on
the
basis of objective factors which are ascertainable by third parties, that despite
the
existence of tax motives VIL was during that accounting period actually established in Luxembourg and carrying on genuine activities there."

The
first alternative was on
the
basis that his arguments on disapplication had not been accepted by us.
- Counsel
for V2
also put forward two alternatives, dependent on whether we accept their submissions that
the
enquiry should now be concluded as serving no proper purpose. They are:
A
"
The
CFC Legislation be disapplied as being contrary to Community Law in
the
case of
V2
insofar as it relates to VIL and
the
accounting period 13th December 2000 to 31st March 2001"
Or
B
"[As in
the
first alternative with
the
addition of] if it is proven, on
the
basis of objective factors which are ascertainable by third parties, that VIL was during that accounting period actually established in Luxembourg and carrying on genuine economic activities there."
In relation to
the
second alternative counsel
for V2
contemplates that
the
addition might be illustrated by reference to 'wholly artificial transactions' or 'letterbox' or 'front' subsidiaries. In
the
case of
V2 the
second alternative was suggested as
the
proper form of disapplication if their arguments on disapplication were rejected.
- It seems to me that
the
essential difference between
the
two versions put forward by each party is whether
the
limitation on
the
freedom of establishment constituted by
the
justification found by
the
ECJ to be permissible is to be read into it so as to restrict
the
class of person who, in
the
words of Lord Walker of Gestingthorpe in Fleming/Conde Nast, "are so circumstanced that
the
offending provisions must not be invoked against them, either in particular cases or at all".
- In that connection there was much dispute and citation of authorities, including Autologic Holdings plc
v
IRC; Fleming/Conde Nast; ICI
v
Colmer; Centros [1999] ECR I-1459 and Inspire Art [2003] ECR I-10155. Given my conclusion on
the
first point it is unnecessary
for
me to reach any conclusion on
the
second. Suffice it to say that, given
the
issue as posed by Lord Walker of Gestingthorpe in Fleming/Conde Nast para 49, I would need a good deal of persuading that it was appropriate simply to disallow
the
CFC Legislation in favour of
V2
in relation to VIL in
the
relevant accounting period, as in paragraphs 64A and 65A above,
for
that would be to ignore
the
justification
for the
CFC Legislation
the
ECJ upheld in Cadbury Schweppes and to disallow
the
CFC Legislation more extensively than
the
ECJ considered to be necessary to preserve
the
relevant freedom of establishment.
Conclusion
- I would allow this appeal on
the
ground that
the
CFC Legislation is susceptible to a conforming interpretation
for
all
the
reasons set out above. In those circumstances it is unnecessary
for
me to reach any concluded view on
the
issue of disapplication and I do not do so. If
the
other members of
the
court agree with me I would invite counsel to agree a form or order to give effect to our conclusions.
Lord Justice Longmore:
- It is never easy to ascertain
the
critical boundary between interpretation (which is within
the
court's remit) and legislation (which is not). Section
2
of
the
European Communities Act 1972 requires any legislation to "be construed and have effect subject to" community rights including, of course, freedom of establishment.
- This obligation is not dissimilar to
the
obligation laid on
the
courts under section 3 of
the
Human Rights Act 1998 to read and give effect to legislation in a way which is compatible with convention rights.
"so far as it is possible to do so."
- In
the
human rights context it has been said that
the
boundary between interpretation and legislation will have been crossed if it is proposed to give a statute a meaning which departs substantially from a fundamental feature of
the
Act (In re S [2002]
2
A.C. 291, 313 para. 40 per Lord Nicholls of Birkenhead), if
the
proposed meaning would remove
the
"core and essence" or "
the
pith and substance" of
the
Act or if it would insert something inconsistent with one of
the
Act's "cardinal principles" (Ghaidan
v
Godin – Mendoza [2004]
2
A.C. 557, 597 para. 111 and 598 para. 114 per Lord Rodger of Earlsferry). Nor can
the
process of interpretation create a wholly different scheme from any scheme provided by
the
Act (page 596 para. 110).
- In
the
present case
the
words which
the Revenue
suggest should be inserted into
the
Act to ensure its compliance with Article 43 of EU Treaty do not create a new and different scheme nor do they offend any of
the
Act's cardinal principles; still less do they remove
the
core and essence of
the
Act. Mr Glick QC
for V2
submitted that an exemption from
the
avoidance provisions in favour of CFCs which are not artificial creations or arrangements would result in a different scheme from that envisaged in
the
Act in its originally enacted form. But I cannot agree.
The
proposed insertion merely adds a further exemption which is allied to (although different from)
the
exemption granted to subsidiaries created or used without
the
motive of reducing
the
UK company's liability to tax. Any inquiry as to motive as originally envisaged by
the
Act, is likely to encompass
the
question whether
the
resulting CFC is an artificial arrangement;
the
proposed insertion merely makes clear that CFCs which are not artificial arrangements will be exempt from
the
provisions of section 747(1) of ICTA. To my mind this is permissible interpretation of
the
statute and not impermissible legislation by
the
court.
- It follows that I agree with
the
reasons given by
the
Chancellor
for
allowing this appeal. I also agree that on any view
the
bald order of
the
judge that
the
CFC legislation is to "be disapplied as being contrary to Community law" is too wide to stand even in
the event of disapplication being required. Since it is not required, I say no more about it.
Lord Justice Goldring:
- I also agree.