Phillipe Leger's opinion on the Cadbury Schweppes plc, Cadbury Schweppes Overseas Limited v Commissioners of Inland Revenue case supports the view that putting subsidies in low-tax countries is not necessarily tax avoidance.
He stated that, in his view, the establishment by a parent company of a subsidiary in another Member State for the purpose of enjoying the more favourable tax regime in that other State does not constitute, in itself, "an abuse of freedom of establishment".
In order to counteract tax avoidance, the United Kingdom legislation on 'controlled foreign companies' (CFCs) provides for the inclusion in the tax base of a United Kingdom resident parent company the profits made by a controlled subsidiary established in another Member State, even though they were not received by the parent company.
That legislation is designed to apply when the profits made by the CFC are subject to much lower taxation than that in effect in the United Kingdom.
Cadbury, a UK resident company, has two finance subsidiaries in Ireland: Cadbury Schweppes Treasury Services (CSTS) and Cadbury Schweppes Treasury International (CSTI).
The UK tax authorities claimed more than £ 8 million in tax from these entities for the financial year ending December 1996.
Cadbury and CSO appealed against that tax notice to the Special Commissioners (United Kingdom), contending that the UK legislation on CFCs was contrary to the rules of the Treaty on freedom of movement. The national court referred questions to the Court for a preliminary ruling in that regard.
In his opinion, advocate-general Leger noted that freedom of establishment is designed to allow the genuine and actual pursuit of an economic activity in the host state and that where that objective is fulfilled, the reasons for which the Community national or company concerned wished to exercise that freedom cannot call into question the protection they derive from the Treaty.
Leger went on to state that that UK legislation is disadvantageous to the parent company to which it applies compared to, on the one hand, a resident company which has established its subsidiary in the United Kingdom and, on the other, a resident company which has established such a subsidiary in a Member State which does not have a sufficiently favourable tax regime to fall within its scope of application.
However, the advocate-general noted that the counteraction of tax avoidance is among the overriding reasons in the public interest, which can justify a hindrance to the exercise of the fundamental freedoms. But a hindrance to one of the freedoms can be justified on the ground of counteraction of tax avoidance only if the legislation in question is specifically designed to exclude from a tax advantage wholly artificial arrangements intended to circumvent national law.
The court's judgement is expected to be handed down in six months' time.