UK and International Tax news

EC Issues Full Decision On Its Investigation Into UK’s Group Finance Exemption

Wednesday 15th May 2019

The European Commission has recently issued its full decision on its state aid investigation into the UK’s CFC Group Finance Exemption.

In October 2017, the EC opened an in depth investigation to verify whether the Group Financing Exemption complied with EU state aid rules.  The investigation did not call into question the UK’s right to introduce CFC rules or to determine the appropriate level of taxation. However, the role of EU state aid control is to ensure member states do not give some companies a better tax treatment than others. The case law of the EU Courts makes clear that an exemption from an anti-avoidance provision can amount to such a selective advantage.

As reported last month, the EC’s investigation concluded 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, the EC found that when 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.

EU state aid rules require that the illegal state aid is recovered in order to remove the distortion of competition created by the aid. There are no fines under EU state aid rules and recovery does not penalise the companies in question but is supposed to restores equal treatment with other companies.

The UK must now implement the decision within four months. In particular, it must provide to the EC a list of the beneficiaries that have received illegal aid under the GFE during the period 2013 to 2018, the total aid amount and calculations of principal aid amounts and interest to be recovered from each beneficiary, together with documents demonstrating that the beneficiaries have been ordered to repay the aid.

It is understood that HMRC have already contacted those groups believed to be impacted. However it is not clear how HMRC can recover state aid amounts under existing domestic legislation or whether there will be taxpayer appeals.

If you would like further details on the above, please contact Keith Rushen on 0044 207 4862378.


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