Vodafone 2 v HM Revenue and Customs

JurisdictionEngland & Wales
Judgment Date04 July 2008
Neutral Citation[2008] EWHC 1569 (Ch)
Docket NumberCase No: CH/2007/APP/0603
CourtChancery Division
Date04 July 2008

[2008] EWHC 1569 (Ch)



Royal Courts of Justice

Strand, London, WC2A 2LL


The Honorable Mr Justice Evans-lombe

Case No: CH/2007/APP/0603

Vodafone 2
The Commissioners Of Her Majesty's Revenue And Customs

Ian Glick QC & Kelyn Bacon (instructed by Linklaters) for the Appellant5/17/2011

David Ewart QC & Sarah Ford (instructed by HMRC Solicitors) for the Respondent

Hearing dates: 20/5/08 – 22/5/08

Approved Judgment

I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.


This is an appeal from a decision of the Commissioners for the Special Purposes of the Income Tax Act (“the Special Commissioners”) dated 26 th July 2007 (“the Decision”). The Decision was taken in the context of proceedings brought by Vodafone 2 (“Vodafone”) seeking an order directing the Commissioners of Her Majesty's Revenue and Customs (“HMRC”) to issue an immediate closure notice in respect of their enquiry into Vodafone's tax return for the accounting period ending 31 st March 2001 (“the Accounting Period”). The purpose of that enquiry was to establish whether or not Vodafone should be held liable to a sum of tax as if it were an amount of UK corporation tax (S 754(1)) on the profits of its wholly-owned subsidiary, Vodafone Investments Luxembourg Sarl (“VIL”) under the controlled foreign companies legislation (“the CFC legislation”) contained in sections 747 to 756 and schedules 24 to 26 of the Income and Corporation Taxes Act 1988 (“ ICTA”) as it stood and was applicable to Vodafone's return for the Accounting Period.

The parties


HMRC require no introduction. Vodafone is an indirect, wholly-owned subsidiary of Vodafone Group plc. It was incorporated in the UK on 4 th October 2000 and is resident in the UK for tax purposes. Vodafone Group plc requires little introduction. It is one of the world's leading mobile telecommunications companies and is the parent company of a group of companies established in the UK, other member states of the EU and many other countries worldwide. VIL is a wholly-owned subsidiary of Vodafone incorporated in Luxembourg on 11 th December 2000. The Luxembourg tax authorities have issued a certificate of tax residency which confirms the status of VIL as resident for tax purposes in Luxembourg. HMRC accept that, at all material times, VIL is and was resident for tax purposes outside the UK.


VIL was incorporated as part of the project by which the Vodafone Group acquired the German company Mannesmann AG purchased in March 2000. VIL is the intermediate holding company of Mannesmann AG and other European telecommunications companies in which the Vodafone Group has an interest. VIL's last annual accounts show equity investments valued at 38 billion euros and debt investments amounting to 35 billion euros representing loans made by VIL to the Mannesmann Group and other telecommunications companies of which it was the holding company. It is HMRC's contention that the interest earned by VIL on its loans to German subsidiaries for the Accounting Period, fell to be taxed as if it was the income of Vodafone as a result of the application to it of the CFC legislation.

The relevant legislation


A UK resident company is subject to UK corporation tax on its worldwide profits. These profits include those of a permanent establishment outside the UK but do not generally include the profits of any of its subsidiary companies. The profits of such subsidiary companies are taxed under the laws of their countries of residence, UK resident subsidiaries under UK corporation tax, foreign registered subsidiaries under the tax regimes of their countries of residence.


As an exception to this general rule, the profits of a controlled foreign subsidiary company (“a CFC”), where the CFC legislation applies, are apportioned among the persons and companies with an interest in it and taxed on those parties accordingly. Section 747(3) of ICTA provide as follows:-

“Subject to Section 748, where the provisions of this Chapter apply in relation to an accounting period of a controlled foreign company, the chargeable profits of that company for that period and its creditable tax (if any) for that period shall each be apportioned in accordance with Section 752 among the persons (whether resident in the United Kingdom or not) who had an interest in the company at any time during that accounting period.”


Where, following such apportionment, amounts equal to all or part of the subsidiary's profits are apportioned to a UK parent (even though those profits have not been received by the parent), those amounts are taxed, as if the parent's income, with credit being given for any foreign tax paid by the subsidiary pursuant to the tax legislation of its country of residence (see Section 747 (4) of ICTA). (“Creditable tax” is defined in Section 751 (6)).


The CFC legislation applies to CFCs which are resident outside the UK in countries where they are subject to a “lower level of taxation” (see Section 747 (1)(c) of ICTA). A CFC is subject to a “lower level of taxation” in any accounting period where the tax paid by the CFC in the country of its residence for tax purposes is less than three quarters of the amount of the tax that would be payable had the subsidiary been resident in the UK (see Section 750 (1) of ICTA). The rules, under the CFC legislation, for the computation of profits of a CFC for the purposes of apportionment to an interested party differ from those under which the profits of a UK-resident subsidiary would be calculated for UK corporation tax purposes. Relief is not given for losses incurred by a CFC and such losses may not be applied to offset taxable profits of another member of the group of companies of which the CFC is one. This contrasts with the position of a UK-resident subsidiary. Vodafone submits that compliance by a parent with the CFC legislation is more burdensome and expensive than compliance by a UK-resident subsidiary with the requirements of corporation tax.


Section 747(3) of ICTA is made expressly subject to Section 74That section sets out in subsection (1) five specific exceptions where the income of CFCs is not subject to apportionment as provided for in Section 747(3). That subsection provides as follows:-

“748 (1) No apportionment under Section 747(3) falls to be made as regards an accounting period of a controlled foreign company if

(a) in respect of that period the company pursues within the meaning of Part I of Schedule 25 an acceptable distribution policy; or

(b) throughout that period the company is, within the meaning of Part II of that schedule, engaged in exempt activities;

(c) the public quotation conditions set out in Part III of that schedule is fulfilled with respect to that period; or

(d) the chargeable profits of the accounting period do not exceed £50,000 or, if the accounting period is less than 12 months, a proportionately reduced amount; or

(e) as respects the accounting period, the company is, within the meaning of regulations made by the board for the purposes of this paragraph, resident in a territory specified in the regulations and satisfies

(1) such conditions with respect to its income or gains as may be so specified

(2) such other conditions, if any, as may be so specified.”

Vodafone accepts that VIL did not fall within any of these exceptions during the Accounting Period. It will be seen that the tests prescribed in the subsections to Section 748(1) are objective tests.


The provisions of the CFC legislation with which the issues in this appeal are primarily concerned are contained in Section 748(3) of ICTA which provides as follows:-

“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, 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 that 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,

and Part IV of Schedule 25 shall have effect with respect to the preceding provisions of this subsection.”


Part IV of Schedule 25 paragraph 19(1) defines what is meant by achieving a reduction in United Kingdom tax for the purpose of Section 748(3). I will assume, for the purposes of this judgment, that receipt by VIL of the loan interest “achieved a reduction in United Kingdom tax” within paragraph 19(1) though this is not admitted by Vodafone.


In the course of the hearing the conditions provided for in Section 748(3) of ICTA for negativing HMRC's power to apportion a CFC's profits were referred to as the “motive test”. It is Vodafone's contention that, in the light of the authorities, VIL meets the motive test and accordingly HMRC has no power to apportion any part of VIL's profits during the Accounting Period to Vodafone to be taxed accordingly. But it is Vodafone's primary contention that, in any event, the provisions of Section 748(3) are incompatible with European Community (“EC”) law, in particular Articles 43 and 48, the “right...

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