UK and International Tax news

AG Gives Opinion On EC and General Court Decisions Into UK CFC Group Financing Exemption

Friday 19th April 2024

The Advocate General of the CJEU has given an opinion on the decisions of the European Commission and General Court in relation to State aid rules and the UK’s CFC Group Financing Exemption.

The GFE was introduced with the reform of the UK CFC regime under FA 2012 and was in force from 1 January 2013 until the end of 2018. Following the adoption of the Anti-Tax Avoidance Directive, all EU Member States had to introduce CFC rules in their legislation as of 1 January 2019.

In line with ATAD, and 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 GFE partially (75%) or fully exempted from UK taxation financing income received by an offshore subsidiary from another foreign group company, even if this income was derived from “UK activities” or the capital being used was “UK connected”.  Therefore, a multinational active in the UK using this exemption was able to provide financing to a foreign group company via an offshore subsidiary paying little or no tax on the profits from these transactions.

In October 2017, the EC opened an in depth investigation to verify whether the GFE complied with EU State aid rules. The EC’s investigation found that when financing income from a foreign group company, channelled through an offshore subsidiary, was financed with UK connected capital and there were no UK activities involved in generating the finance profits, the GFE was justified and did not constitute State aid under EU rules. However, when financing income from a foreign group company, channelled through an offshore subsidiary, was derived from UK activities, the GFE was not justified and constituted State aid under EU rules.

The UK and one of the taxpayers challenged the EC decision before the General Court, but that court dismissed their actions on 8 June 2022. The UK and two other taxpayers then appealed to the CJEU.

The AG’s opinion has now concluded that the EC and the General Court erred in determining that the CFC rules constituted the correct reference framework for examining whether a selective advantage had been granted. The correct reference framework ought to have been the general UK corporation tax system as the CFC rules form part of that system and were not separate.  The CFC rules can only be fully understood when considering the UK corporate tax system as a whole.

AG opinions are not binding on the CJEU as AGs only propose to the Court a legal solution to the cases for which they are responsible. The Judges of the Court will now begin their deliberations in this case and judgment will be given at a later date.

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