CFC rules generally provide that the income produced by controlled foreign companies which is subject to a lower tax rate in their country compared to the tax rate applicable to the resident shareholders, or which benefits from a favorable foreign tax treatment, will be allocated, as CFC income. The CFC rules generally apply to apportion a foreign company�s income to the parent company and to subject it to current taxation in the parent company�s country without reference to a dividend distribution. Some of the CFC rules within the EU include exemptions for EU entities, with the exception of the UK, Danish and German CFC rules which also apply to EU entities.

The Cadbury Schweppes case on the 12th of September 2006 by the European Court of Justice (ECJ) is bringing about changes to the CFC rules that EU countries apply.

In particular, 9 countries Germany, Denmark, Finland, UK, Italy, Sweden, Portugal, France and Spain will have to amend their CFC rules.

The broader scope of the above countries CFC rules (as in the case of the UK) does not conform to the ECJ decision, which provides that the national legislation is contrary to EC law as representing a restriction on freedom of establishment, except where it relates only to wholly artificial arrangements intended to escape the national tax normally payable. The Court also indicated that CFC legislation must not be applied where it is proved, on the basis of objective factors that are ascertainable by third parties, that, despite the existence of tax motives, the CFC is actually established in another EU Member State and carries on genuine economic activities there.

Denmark and Germany are among the first two EU countries to propose new tax legislation to conform to the ECJ\’s ruling.