A senior tax figure has welcomed the 'common-sense' approach of a Court of Appeal tax ruling concerning the income tax of controlled foreign companies (CFC). The ruling - following a long battle between Vodafone and HM Revenue & Customs over the taxation of subsidiaries established in the European Economic Area - exempts the company from being taxed provided the companies are engaged in genuine economic activities, and are not merely established abroad with the aim of diverting profits from the UK so as to achieve a reduction in UK tax. Bill Dodwell, head of Deloitte's tax policy group, said: 'This is a common-sense judgment and hopefully will offer a good way forward in CFC cases. However, what we really need is some helpful guidance on the sort of activities that fall within this new exemption'. The conflict over tax followed Vodafone's acquisition of the Mannesmann AG group of companies in 2000. As part of this process, Vodafone established a Luxembourg subsidiary, the intermediate holding company of Mannesmann AG and other European companies. HMRC contended that the subsidiary, Vodafone Investments Luxembourg Sarl (VIL), should be taxed in the UK for its interest income on its debt investments, in accordance with the UK's CFC rules. But Vodafone argued that the UK's CFC laws contradicted the EC Treaty, particularly in relation to the right to freedom of establishment, a point that was made in the European Court of Justice ruling about Cadbury Schweppes in 2006. The court had decided then that UK CFC rules could only lawfully apply in respect of wholly artificial arrangements that had no genuine economic activity. The court's decision - that the UK's CFC law should be interpreted to allow an exception to taxation for companies established in the EEA, which carry on genuine economic activities - may yet be appealed. Additional clarification, over what qualifies as genuine economic activities, is also expected to be called for.