The relationship between CFC rules and freedom of establishment is an issue which is not resolved in light of European “trends.” The Court of Cassation ruling no. 25281/2015, which affirmed the compatibility of the regulation of Art. 167, Paragraph 1 of the Consolidated Law on Income Tax - applicable exclusively to low-tax jurisdictions - with the Community right of establishment principle. The ruling offers the impetus for an analysis of the relationship between national CFC regulations and European law on the right of establishment. It also considers the content of the recent EU anti-tax avoidance directive.
In the case decided by the Court of Cassation in its 16 December 2015, no. 25281 ruling, a company requested the Tax Authority not apply the CFC regulations for a subsidiary based in Cyprus. Notably, it asked the relevant rule, Art. 167, Paragraph 1 of the Consolidated Law on Income Tax, not to be applied because during the relevant tax period, Cyprus was a country on the black list. As a result of the negative response, the applicant company turned to the tax court, which, at both first and second instance, ruled against it. The company appealed to the Cassation, claiming that the application of the regime set out in Art. 167, Paragraph 1 of the Consolidated Law on Income Tax to a Cypriot subsidiary company was a violation of the right of establishment principle. This was because it imposed the most unfavourable evidentiary regime for entities located in low-tax jurisdictions upon a company established in a country now part of the EU. The applicant asked the Supreme Court, as an alternative to accepting the appeal, to submit the issue to the EU Court of Justice for a preliminary ruling due to incompatibility of the domestic rules with European Union law.
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