S to overhaul the way the foreign profits of UK headquartered multinational companies are taxed could fall foul of European law, according to a top legal firm.
The existing Controlled Foreign Companies (CFC) regime currently breaks EU law, following a landmark 2006 case involving Cadbury Schweppes.
At that time, the European Commission said the British government was wrong to try and tax foreign profits that were not “purely artificial”.
However, Gary Richards, tax partner at Berwin Leighton Paisner, yesterday warned the new rules – designed to be much more attractive for multinational firms – could still break EU law.
He said: “One issue which remains is whether HMRC’s view that EU law permits a UK tax charge on artificially diverted profits is right, or whether even these reforms may yet be open to challenge.”
Richards’ warning came after the government published its proposals on reforming the CFC regime, which were broadly welcomed by businesses and tax experts.
The most important change is that genuinely earned profits from foreign jurisdictions will not be taxed in the UK.
The much-hated “motive test”, which demanded firms prove that profits were “genuine” has been dropped. Multinationals said it was almost impossible to pass the test, hence the reason why a raft of them, including advertising giant WPP, quit UK shores for tax purposes.
Sir Martin Sorrell, chief executive of WPP (pictured), has he will ask the advertising firm’s board to vote on making a return to the UK should he agree with the government’s proposals.