UK and International Tax news

UK Appeals EC Decision On State Aid Investigation

Saturday 31st August 2019

The UK has appealed the EC’s decision that part of the CFC Group Finance Exemption constitutes state aid.

The general purpose of the UK’s CFC rules is to prevent UK companies from using subsidiaries, based in low or nil tax jurisdictions, to avoid tax in the UK. However, since 2013, the CFC rules include an exception for certain financing income of multinational groups active in the UK [the Group Financing Exemption].

The GFE was in force from 1 January 2013 until the end of 2018. In line with ATAD, as of 1 January 2019, the GFE applies only where a CFC charge on financing income from foreign group companies would otherwise apply exclusively under the UK connected capital test (i.e. not also or exclusively under the UK activities test). The CFC rules as currently applied therefore no longer raise concerns under State aid rules.

The original UK CFC rules established two tests to determine how much of the financing profits from loans granted by an offshore subsidiary are to be reallocated to the UK parent company and, hence, taxed in the UK (“CFC charge”), namely:

  • The extent to which lending activities, which are most relevant to managing the financing activities and thus generating the financing income, are located in the UK (“UK activities test”); or
  • The extent to which loans are financed with funds or assets, which derive from capital contributions from the UK (“UK connected capital test”).

Following the EC’s investigation into the GFE, the EC concluded in April 2019 that when financing income from a foreign group company, channelled through an offshore subsidiary, is financed with UK connected capital and there are no UK activities involved in generating the finance profits, the GFE is justified and does not constitute State aid under EU rules.  However, where financing income from a foreign group company, channelled through an offshore subsidiary, derives from UK activities, the GFE is not justified and constitutes State aid under EU rules.

The UK has appealed on four grounds to the CJEU alleging manifest error of assessment and identification of the wrong reference system, the exemptions are not derogations, error of assessment regarding selectivity, and there is no effect on intra EU trade.

The UK has asked the CJEU to consider whether the EC’s decision was erroneous and should be annulled.


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