UPDATE 1-Vodafone wins UK tax-avoidance battle

(Adds Vodafone comment, background, shares)

LONDON, July 4 (Reuters) - British-based mobile phone group Vodafone (VOD.L) on Friday won a test-case tax battle which means it does not have to pay extra corporation tax to the UK government on its Luxembourg-based subsidiary.

Mr Justice Edward Evans-Lombe ruled in Vodafone's favour in the High Court battle which could save the mobile phone group billions of pounds.

Vodafone had made a provision of 2.2 billion pounds ($4.4 billion) in case it lost the case.

The UK government can take the decision to appeal.

The judge ruled that Vodafone should not be held liable to a sum of tax as if it were an amount of UK corporation tax on the profits of its wholly owned subsidiary, Vodafone Investments Luxembourg Sarl (VIL).

VIL is the intermediate holding company of German company Mannesmann AG, which Vodafone bought in March 2000, as well as other European telecommunications companies in which Vodafone has an interest.

The Luxembourg tax authorities have issued a certificate of tax residency which confirms VIL is resident for tax purposes in Luxembourg, but the UK government claimed that VIL's profits should be subject to corporation tax in Britain under Controlled Foreign Companies (CFC) legislation introduced in 1988.

In 2006, the European Court of Justice ruled that the CFC rules were restrictive, however, and could only be justified where subsidiaries were set up artificially to gain a tax advantage.