The European Commission has launched a formal state aid investigation into a part of the UK’s revised controlled foreign companies (CFC) regime introduced in January 2013. The ‘finance company exemptions’ (in TIOPA 2010 Part 9A chapter 9) allow companies to claim a partial or full exemption from the CFC charge for profits from certain intra-group financing arrangements involving non-UK companies.
Announcing the investigation (see here), EU competition commissioner Margrethe Vestager said: ‘Rules targeting tax avoidance cannot go against their purpose and treat some companies better than others. This is why we will carefully look at an exemption to the UK’s anti-tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU state aid rules.’
The Commission’s press release says it ‘has doubts whether this exemption is consistent with the overall objective of the UK CFC rules’. The purpose of these rules, the Commission notes, is to ‘prevent UK companies from using a subsidiary, based in a low or no tax jurisdiction, to avoid taxation in the UK’.
The revised CFC rules, introduced by Finance Act 2012, were intended to move the UK regime towards a more territorial approach, based on taxation where economic activity takes place and away from attributing worldwide income of a group to the UK. During the consultation process, the government described the aim of the new regime as ‘to target only those circumstances that result in artificial diversion of UK profits’. The government also noted at the time that: ‘The challenge is to identify such instances whilst exempting all others with the minimum compliance burden.’
The rule change was also a response to the CJEU ruling in Cadbury Schweppes plc and another v IRC [2006] STC 1908. Eloise Walker, partner at Pinsent Masons, commented: ‘The UK government is between a rock and a hard place. If its CFC rules are too tough, the CJEU will complain that companies can’t establish genuine business operations elsewhere, but now the EU Commission is saying that the rules should be tougher in relation to finance income.’
The EU anti-tax avoidance directive (ATAD) gives all EU member states the power to introduce CFC rules in their national legislation from 1 January 2019, although the ATAD does not provide for specific exemptions of the sort contained in the UK legislation. The Commission regards CFC rules in general as ‘an effective and important feature of many tax systems to address tax avoidance’. The Commission stresses it is not questioning the UK’s right to introduce CFC rules or to determine the appropriate level of taxation.
The Commission will release its decision in due course under the case number SA.44896 in the state aid register on its competition website.
The European Commission has launched a formal state aid investigation into a part of the UK’s revised controlled foreign companies (CFC) regime introduced in January 2013. The ‘finance company exemptions’ (in TIOPA 2010 Part 9A chapter 9) allow companies to claim a partial or full exemption from the CFC charge for profits from certain intra-group financing arrangements involving non-UK companies.
Announcing the investigation (see here), EU competition commissioner Margrethe Vestager said: ‘Rules targeting tax avoidance cannot go against their purpose and treat some companies better than others. This is why we will carefully look at an exemption to the UK’s anti-tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU state aid rules.’
The Commission’s press release says it ‘has doubts whether this exemption is consistent with the overall objective of the UK CFC rules’. The purpose of these rules, the Commission notes, is to ‘prevent UK companies from using a subsidiary, based in a low or no tax jurisdiction, to avoid taxation in the UK’.
The revised CFC rules, introduced by Finance Act 2012, were intended to move the UK regime towards a more territorial approach, based on taxation where economic activity takes place and away from attributing worldwide income of a group to the UK. During the consultation process, the government described the aim of the new regime as ‘to target only those circumstances that result in artificial diversion of UK profits’. The government also noted at the time that: ‘The challenge is to identify such instances whilst exempting all others with the minimum compliance burden.’
The rule change was also a response to the CJEU ruling in Cadbury Schweppes plc and another v IRC [2006] STC 1908. Eloise Walker, partner at Pinsent Masons, commented: ‘The UK government is between a rock and a hard place. If its CFC rules are too tough, the CJEU will complain that companies can’t establish genuine business operations elsewhere, but now the EU Commission is saying that the rules should be tougher in relation to finance income.’
The EU anti-tax avoidance directive (ATAD) gives all EU member states the power to introduce CFC rules in their national legislation from 1 January 2019, although the ATAD does not provide for specific exemptions of the sort contained in the UK legislation. The Commission regards CFC rules in general as ‘an effective and important feature of many tax systems to address tax avoidance’. The Commission stresses it is not questioning the UK’s right to introduce CFC rules or to determine the appropriate level of taxation.
The Commission will release its decision in due course under the case number SA.44896 in the state aid register on its competition website.
