Cadbury Schweppes vs UK – EU Case C-196/04

The Cadbury Schweppes case is a seminal ruling in the context of the European Union’s freedom of establishment and the limitations on Member States' tax authorities to impose tax measures on Controlled Foreign Companies (CFCs). The key issue in this case was whether the UK’s CFC legislation, which sought to include the profits of foreign subsidiaries (CFCs) in the tax base of their UK parent company, violated the freedom of establishment under the EU Treaty.

The Court ruled that Member States may apply CFC rules, but only where such subsidiaries are wholly artificial arrangements intended to circumvent domestic tax laws. If the subsidiaries are engaged in genuine economic activities, their profits cannot be included in the tax base of the parent company, even if they benefit from a lower tax rate in another EU Member State.

This decision significantly limited the scope of the UK’s CFC rules and established that the mere fact of setting up a subsidiary in a low-tax jurisdiction does not, in itself, justify the imposition of domestic tax measures. The ruling clarified that tax avoidance measures must be targeted only at wholly artificial arrangements that lack economic substance.