UK and International Tax news

EC State Aid Investigation Into UK CFC Group Finance Exemption

Wednesday 1st November 2017

The European Commission has opened an in-depth probe into the UK’s CFC rules which exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance which will investigate if the rules are in breach of EU State aid rules.

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 have included an exception for certain financing income of multinational groups.

This Group Financing Exemption exempts from reallocation to the UK finance income received by an offshore subsidiary from another foreign group company so that the offshore subsidiary pays little or no tax on such income in the country where it is based, and this finance income is also not or only partially reallocated to the UK for taxation under the exemption.

The EC’s State aid investigation does not call into question the UK’s right to introduce CFC rules or to determine the appropriate level of taxation. However, the EC has emphasised the role of EU State aid control is to ensure member states do not give some companies a better tax treatment than others. Recent EU case law has indicated that an exemption from an anti-avoidance provision can amount to such a selective advantage.

At this stage, the EC has doubts whether the Group Financing Exemption complies with EU State aid rules, in particular, whether this exemption is consistent with the overall objective of the UK CFC rules.

The opening of an in-depth investigation gives the UK and interested third parties an opportunity to submit comments and does not prejudge the outcome of the investigation.

 

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