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Commission finds UK CFC exemption ‘partially justified’ under state aid rules

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The European Commission’s state aid investigation into the finance company exemption under the UK’s CFC regime has concluded that the exemption was justified when given for finance involving UK-connected capital, but constituted state aid when the financing income arose from UK activities. The Commission now expects the UK to recover the tax from companies who benefitted from illegal state aid.

The finance company exemption (TIOPA 2010 Pt 9A Ch 9) was introduced in January 2013 and continued until amended by Finance Act 2019 to comply with the EU anti-tax avoidance directive with effect from 1 January 2019. The exemption covered certain intra-group non-trading finance profits arising from qualifying loan relationships.

The Commission opened its formal state aid investigation in October 2017 and has concluded that the exemption, while ‘partially justified’, grants a selective advantage to certain multinational companies.

The 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 exemption is justified and does not constitute state aid under EU rules; and
  • when financing income from a foreign group company, channelled through an offshore subsidiary, derives from UK activities, the exemption is not justified and constitutes state aid.

The Commission notes that EU state aid rules continue to apply in full to the UK until it is no longer a member of the EU. The UK is now expected to recover the illegal state aid by re-assessing on a case-by-case basis the tax liability of UK companies granted exemption in relation to profits derived from UK activities.

All EU member states were required by the anti-tax avoidance directive (ATAD) to introduce CFC rules by 1 January 2019. The UK introduced legislation in Finance Act 2019 which amended the exemption to apply only where a CFC charge on financing income from foreign group companies would otherwise apply exclusively under the UK connected capital test (not under the UK activities test). The Commission has therefore confirmed that the UK’s CFC rules no longer raise state aid concerns. See

Commenting on the Commission’s findings, Totis Kotsonis, partner and head of the state aid practice at Eversheds Sutherland, said: ‘The European Commission had originally indicated its intention to complete its investigation and issue its decision well before 29 March but signified more recently that the timetable was likely to slip. At this stage it is unclear as to whether the decision can or will be fully implemented, including recovery of any aid granted to deemed beneficiaries, if the UK were to leave the EU without a withdrawal agreement.’

Ben Jones, a tax partner at Eversheds Sutherland added: ‘The decision appears pragmatic and reasoned in finding only part of the relevant UK tax rule give rise to an illegal tax advantage and the timing is not overtly political, falling as it does after the planned date of exit from the EU. That is not to say that the UK government and interested taxpayers will not seek to appeal this decision when the full text [of the decision] and therefore the Commission’s detailed reasoning becomes available.’

Issue: 1438
Categories: News