UK and International Tax news

CJEU Annuls EC Decision Finding UK CFC Rules To Be State Aid

Friday 27th September 2024

The CJEU has annulled the European’s Commission decision finding certain UK rules on the taxation of CFCs to be State Aid, incompatible with the internal market, and set aside the judgment of the General Court confirming that decision.

The EC and the General Court erred in law in finding that the rules applicable to CFCs constituted the appropriate reference framework for examining whether a selected advantage had been conferred.

The general purpose of the UK’s CFC rules was to prevent UK companies from using subsidiaries, based in low or nil tax jurisdictions, to avoid tax in the UK. Since 2013, the rules included an exception for certain financing income of multinational groups active in the UK [the Group Financing Exemption].

The original UK CFC rules established two tests to determine how much of the financing profits from loans granted by an offshore subsidiary are to be reallocated to the UK parent company and, hence, taxed in the UK (“CFC charge”), namely:

  • the extent to which lending activities, which are most relevant to managing the financing activities and thus generating the financing income, are located in the UK (“UK activities test”); or
  • the extent to which loans are financed with funds or assets, which derive from capital contributions from the UK (“UK connected capital test”).

The GFE was in force from 1 January 2013 until the end of 2018. 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, and not also or exclusively under the UK activities test. The CFC rules as currently applied therefore no longer raise concerns under State aid rules.

Following the EC’s investigation into the GFE, the EC concluded in April 2019 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 GFE is justified and does not constitute State aid under EU rules.  However, where financing income from a foreign group company, channelled through an offshore subsidiary, derives from UK activities, the GFE is not justified and constitutes State aid under EU rules.

EU state aid rules require that the illegal state aid is recovered in order to remove the distortion of competition created by the aid. There are no fines under EU state aid rules and recovery does not penalise the companies in question but is supposed to restores equal treatment with other companies.

Given the EC’s decision, the UK appealed to the CJEU to consider whether the EC’s decision should annulled, as otherwise, the UK would have to implement the decision within four months, provide to the EC a list of the beneficiaries that have received illegal aid under the GFE during the period 2013 to 2018, and total aid amounts thereof plus detailed calculations of the principal aid amount and recovery interest to be recovered from each beneficiary, together with documents demonstrating that the beneficiaries have been ordered to repay the aid.

The CJEU has now held that the CFC rules were not severable from the broader CT rules and that the GC had made an error in the determination of the reference framework.

It is understood that over 20 companies were facing tax assessments totaling in excess of £600m.

 

If you would like more detail on this decision or on the CFC rules, please contact Keith Rushen on 0207 486 2378.

 

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