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The EC’s group finance exemption state aid ruling

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On 2 April 2019, the European Commission published its final decision that the group finance exemptions (GFE) from the UK’s CFC rules constituted unlawful state aid. The UK will therefore be required to assess UK corporates with foreign group finance subsidiaries for what is essentially a retrospective CFC tax charge. It has been reported the total amount at stake exceeds £1bn.

The GFEs provided a full or partial (75%) exemption from the UK CFC charge for finance income arising on intra-group loans between non-UK members of a corporate group. Previous articles in this journal have discussed the Commission’s decision to open a state aid investigation on the basis that the GFEs provide a selective and unjustified advantage to UK parented groups with a non-UK finance subsidiary, when compared with wholly domestic groups and groups lending to third parties. 

In concluding that the GFEs constitute state aid, the Commission distinguished between finance income derived from UK activities, and finance income not derived from UK activities. In particular, the Commission concluded that when: 

  • finance income from a foreign group company is received by another foreign group treasury company; 
  • the income relates to loans financed using funds or assets deriving from capital contributions in the UK; and 
  • no UK activities are involved in generating the income, 

the GFEs were justified under state aid rules, as they avoided ‘complex and disproportionately burdensome intra-group tracing exercises’ which would be required to assess the percentage of profits funded with UK assets.

However, the Commission also concluded that the GFEs did constitute unlawful state aid to the extent the GFEs exempted such finance income where the most relevant activities involved in managing the financing activities (and thus generating the income) were located in the UK. This is on the basis that a proxy rule in these cases is not justified as assessing whether finance income derives from UK activities is, in the Commission’s view, not unduly complex or burdensome.

Why it matters?

Although the GFEs were amended with effect from 1 January 2019 so that they are now compliant, the Commission’s decision means that HMRC is now compelled under EU law to recover the state aid from all recipients. 

For UK taxpayers with group treasury CFCs, this means all finance profits of the CFC between 2013 and 2018 which were generated by UK activities and previously fell within the GFEs, are now retrospectively subject to the full CFC charge (at a rate of between 23% and 19%), plus compound interest. 

Potentially affected taxpayers should consider the extent to which UK personnel were involved in the relevant lending and debt managing/servicing decisions in relation to relevant historic offshore finance income; and consider whether to appeal the Commission’s decision to the EU courts. The time limit to appeal is tight, being only two months from the publication of the Commission’s decision in the Official Journal.

Taxpayers with a group treasury company that is genuinely established in an EU/EEA member state should have grounds to argue that recovery of the tax is unlawful based on the freedom of establishment under EU/EEA law. Taxpayers in a different position may have other arguments to challenge any retrospective tax demand.