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On 26 January 2010, the UK Treasury and the UK tax authorities, HM Revenue and Customs (“HMRC”), issued a further consultation document (the “Consultation Document”) as the next stage in the process of reforming the UK Controlled Foreign Company (“CFC”) rules.  Comments have been requested by 20 April 2010. In outline, the proposals are for rules that are similar in design to the existing CFC rules, but with a wider exemption for trading and some specified investment activity, and certain new imputed tax charges.

The process of revising the UK CFC rules has been underway for about two years, given widespread dissatisfaction among taxpayers with the relative complexity and restrictiveness of those rules, as well as questions about whether the rules in their existing form are compatible with EU law.  The impact of EU law on the UK CFC rules is currently being litigated in the UK courts in the Vodafone 2 case.  In that case, the Supreme Court has recently declined to hear an appeal from the 2009 decision of the Court of Appeal that the current CFC rules can be read subject to the proviso that (in order to safeguard the EU freedom of establishment) they do not apply to a company that is “actually established in another member state of the EEA and carries on genuine economic activities there”: see the decision of the European Court of Justice in Cadbury-Schweppes v IRC case 196/04.  It is expected that there will now be a hearing to establish whether the arrangements in that case were not artificial and had the necessary substance.