Comment: It could be argued that the Cadbury Schweppes case decided by the European Court of Justice (ECJ) this month is the most significant tax case yet for the Irish economy.

Cadbury Schweppes argued that Britain was not entitled to tax profits of two subsidiaries operating from the International Financial Services Centre (IFSC) in Dublin and which were Irish rather than British tax resident.

The Celtic Tiger has been largely driven by high levels of inward investment and a crucial factor in attracting this has been the Republic's relatively low rate of corporation tax.

This has become increasingly important as Ireland's competitiveness in other areas such as labour costs has been eroded in recent years.

Irish governments of all complexions have understood how crucial the low rate of corporation tax has been. For decades, it has been a major objective of policy to protect our ability to offer this incentive to international business. That is why Ireland has consistently and successfully resisted any moves towards EU tax harmonisation.

It is a sign of how important the retention of the low rate for inward investors is to our economic policy that, when presented with an all or nothing ultimatum by the EU, the Government decided to extend the low rate to all companies operating in the State.

Most of the jurisdictions where our inward investors are headquartered have tax rules commonly known as Controlled Foreign Corporation ("CFC") rules. Essentially, they provide that if a company which is headquartered in, say, the UK establishes a subsidiary in, say, the Republic, the profits of the Irish company can be taxed as if they had arisen directly from the UK company.

The effect of this is to remove the tax benefit which the UK parent would have had by establishing a subsidiary in the Republic.

CFC rules had the potential to completely undermine one of the Republic's main competitive advantages and were certainly a deterrent to attracting inward investors to Ireland.

The ECJ's almost complete outlawing of CFC rules is therefore very good news for the Republic - not just because existing provisions have been outlawed but also, and perhaps more importantly, because the risk of worse CFC rules in the future has been removed.

The court held that CFC rules are illegal when applied to EU-based subsidiaries. Furthermore, it held that the rules are illegal even where the reduction of tax is admittedly a motivation for the establishment of the subsidiary.

The court did allow for one exception, which is that CFC rules can be applied to "wholly artificial arrangements". It seems likely that national tax authorities will try to argue that this allows them significant scope to retain CFC rules, but an objective reading of the judgement makes it clear that this is a very limited exception.

The court suggests that the extent to which the CFC exists in terms of premises, staff and equipment would be important in being regarded as a genuine operation. This nuance in the judgment is likely to be further good news for Ireland - companies are more likely to establish substantial Irish operations with employees and premises in order to avoid falling foul of the "wholly artificial" exemption.

Also helpful from an Irish viewpoint is the fact that the judgment is only of assistance to subsidiaries established in an EU/EEA location. Ireland may have a new advantage in some situations over locations outside the EU/EEA which compete with us for business.

The ECJ has traditionally been very good for taxpayers, although commentators had noticed a recent tendency to take into account the concerns of member states regarding loss of tax revenues. The fact that it has resisted this temptation in the Cadbury Schweppes case is to be welcomed and gives comfort that the ECJ will continue to rule on the basis of law and not on the basis of political pressure.

As is often the case with legal judgments, the Cadbury Schweppes decision did leave some detailed questions unanswered. The court did not address the question of outsourcing - for example, will the court accept that an arrangement is not wholly artificial if the subsidiary buys in services from third parties rather than having the services provided by its own employees?

Also, the court did not explicitly address the question of capital intensive industries such as many financial services activities where the key driver of profitability will often be the amount of capital employed rather than the premises or employee infrastructure. There is nothing artificial about a company with a high level of capital generating very large profits with very few or even no employees.

It may be that future case law will resolve these issues. In the meantime businesses have the comfort of knowing that if they establish a substantial infrastructure in a low tax country, they should come within the safe harbour established by the court.

We can expect that many EU-based companies will now look again at the Republic as a possible location for investment and we can be happy that one of the risks to existing investment has been removed.

However, before we get too complacent, we need to bear in mind that many new EU states are aggressively pursuing low tax policies in order to maximise their share of international investment. We need to make sure that the overall package we offer, of which tax is a crucial part, remains sufficiently competitive to attract our share and keep the Celtic Tiger fed.

Conor O'Brien is a taxation partner with KPMG.