The UK's Special Commissioners have this week rejected telecoms firm, Vodafone's bid to end an already long-running tax dispute over the tax liabilities of its Luxembourg subsidiary.
The case has its origins in Vodafone's controversial takeover of the German telecommunications group Mannesman in a record breaking corporate acquisition which took place in 2000.
Vodafone disposed of shares it owned in Manneseman through its Luxembourg subsidiary, Vodafone Investments Luxembourg Sarl (VIL Sarl).
HMRC has argued that it should be able to collect taxes from the Luxembourg entity (to the tune of more than GBP 2 billion), as it is a Controlled Foreign Corporation and acts as a holding company for proceeds from certain UK activities.
However, Vodafone has argued that the UK's CFC laws are in contravention of EU legislation.
A similar case (headed by Cadbury Schweppes) went before the European Court of Justice last year, leading the Court to rule that providing the firm could prove that its subsidiaries were undertaking genuine economic activity, they could be exempted from the UK's CFC rules.
Vodafone had hoped that the Special Commissioners would halt the HMRC probe into its tax activities, but delivering their decision on Wednesday, the Commissioners stated that the firm would need to undergo the same economic substance test.
However, the tribunal decided not to refer the matter to the ECJ, something that is seen as positive for Vodafone.
A comprehensive report in our Intelligence Report series looking at offshore and onshore corporate structures and their tax implications is available in the Lowtax Library at http://www.lowtaxlibrary.com/asp/subs_reports.asp and a description of the report can be seen at http://www.lowtaxlibrary.com/asp/description_report7.asp
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