The European Commission is opening a new state-aid investigation in the UK.
In an announcement on October 26, 2017, the EU Commission says it is looking into the UK Group Financing Exemption, which exempts certain transactions by multinational groups from the otherwise applicable Controlled Foreign Corporations (CFC) rules. The EU Commission believes that this exemption may have given an unfair tax advantage to certain UK resident companies, which violates EU state aid rules. The EU Commission will reach a final decision at the end of the formal investigation.
The EU Commission also noted that, in the context of the Brexit negotiations, EU state aid rules will continue to fully apply to the UK for the entire time that the country remains a EU member.
This is the most recent in a series of state aid investigations that have been launched by the EU Commission in its efforts to crack down on harmful tax competition between Member States and tax avoidance. The investigation should be seen in light of the EU Commission's on-going examinations of certain Luxembourg tax rulings, as well as the negative decisions already rendered since 2015 on tax rulings that were issued by Luxembourg, the Netherlands, Belgium and Ireland.
The UK CFC rules effectively prevent UK companies from using a subsidiary located in a low or no tax jurisdiction to avoid paying UK taxes. The UK's CFC rules allow UK tax authorities to re-apportion the profits of certain non-resident subsidiaries, which are considered to be "artificially diverted" from the UK, to their UK parent company. However, the Group Financing Exemption was introduced in 2013, which allows certain financing income to avoid being allocated to the UK parent company's taxable profits (e.g. interest payments received on loans), provided that such financing income received by the offshore subsidiary derives from another foreign group company.
According to the EU Commission, this exemption creates a difference in taxation between profits derived at the level of the CFC from financing a foreign group company, which will not or only partially be subject to taxation in the UK and other types of income, which will be subject to taxation in the UK under the CFC rules.
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