Cadbury Schweppes is another tax law case. The Cadbury Schweppes group had established two subsidiaries in Ireland solely in order that profits related to the internal financing activities of the Cadbury Schweppes group might benefit from the more favourable tax regime there. In the view of the national court, the subsidiaries were incorporated in Ireland in order not to fall within the application of certain UK tax provisions on exchange transactions. After the national tax authorities demanded the corporation tax, Cadbury Schweppes appealed. In the end the relevant UK court referred the case to the ECJ to clarify the EC law implications.
EC law implications
Once again, freedom of establishment (Articles 43 and 48 EC Treaty) was at issue in this case. The question referred to the ECJ was whether freedom of establishment precludes national tax legislation, under certain conditions, from imposing a charge upon a parent company on the profits made in a foreign subsidiary.
Decision of the court
In Cadbury Schweppes the ECJ indicates that it is necessary to examine the behaviour of a taxpayer who incorporates a company in another member state in light of the aim of freedom of establishment in order to assess whether the behaviour at stake is a mere exercise of freedom of establishment or a legal abuse. In this context, national measures restricting freedom of establishment may be justified where they specifically relate to wholly artificial arrangements aimed at circumventing application of the legislation of the member state concerned. The ECJ considered that freedom of establishment requires a stable and continuing basis in the economic life of a member state other than the state of origin. Therefore a company cannot invoke freedom of establishment in another member state for the sole purpose of benefiting from more advantageous legislation unless the establishment in the other member state is intended to carry on genuine economic activity. According to the ECJ a restriction of freedom of establishment is therefore possible in cases of a ‘letterbox’ or ‘front’ subsidiary.
With this ruling the ECJ seems to move away from Centros, where the company founders set up a company that had never engaged in any economic activity in its founding state and was aimed solely at avoiding Danish company law.