Brussels, May 2 - The British government won a partial victory on Tuesday as an adviser to the top EU court said it could stop artificial arrangements to avoid tax via foreign units, but lawyers said proving "artificial" could be difficult.
The adviser's opinion followed a complaint by Cadbury Schweppes, the world's largest confectionery group, that Britain's "controlled foreign company" (CFC) tax rules broke EU law and discouraged firms from setting up shop abroad.
Cadbury has units in Ireland, an EU member state with low corporate taxes, to raise finances for the group's operations.
The advocate general of the European Court of Justice said setting up a subsidiary in another member state to benefit from a low tax rate was not in itself an abuse of EU rules on freedom of establishment, but a member state could act in the public interest by hindering such freedom to stamp out tax avoidance.
"In the opinion of (the advocate general), the United Kingdom legislation on 'controlled foreign companies' is compatible with community law if it applies only to wholly artificial arrangements intended to circumvent national law," the court said in a statement.
The full court upholds the adviser's opinion in most cases.
A British finance ministry spokesman said: "We welcome the fact that the Advocate General has not found the UK's CFC rules contrary to EU law."
Tax experts, however, said the government could still lose such claims in UK courts, along with significant tax revenues.
"I think it will be quite difficult for member states to prove something is wholly artificial," said Mark Persoff of law firm Clifford Chance.
The advocate general said it was for the national courts to assess, using criteria put forward in the opinion, whether the overseas unit had been set up to avoid tax.
These criteria include the degree of physical presence in the country, the economic value of the activity to the group overall, and whether the activity is genuine.
RULE CHANGE SEEN
The government might have to implement a change in tax law in order to win such cases, tax experts said.
Cadbury was disputing an 8.6 million pounds ($15.8 million) tax demand from the British government for 1996.
Waseem Khokhar of law firm DLA Piper Rudnick Gray Cary said the opinion, if upheld, should boost a group of about 20 claimants, known as the CFC and Dividend Group, that are challenging the CFC rules in a similar way to Cadbury.
"You are talking very significant amounts in the event that the other group companies are successful," Khokhar said.
Persoff added: "Assuming the court upholds these tests, I think the UK will be forced to recast its CFC rules.
"This again demonstrates the continued impact that the European Court of Justice is likely to have on member state tax systems," Persoff said. ($1=.5442 pound)