The EC will investigate whether the Group Financing Exemption in the UK’s CFC rules breaches State aid rules.
The European Commission has announced that it will be conducting a state aid investigation into the Group Financing Exemption included in the UK’s Controlled Foreign Company (CFC) rules, to investigate if the exemption which allows multinationals to pay less UK tax is in breach of the EU state aid rules. Since 2013, the Financing (Finco) Exemption has allowed certain interest payments received by overseas subsidiaries of UK companies to be exempt from reallocation to the UK under the CFC rules. This means the income is potentially exempt from UK taxation. The EC has stated that it “has doubts whether this exemption is consistent with the overall objective of the UK CFC rules.”
Many jurisdictions have CFC rules which allow profits in offshore subsidiaries to be taxed at the level of the parent. Such rules represent an important anti-avoidance measure in many tax systems, however a number of EC states currently have no such rules.
The role of EU state aid control is to ensure Member States do not use taxpayer funded resources to give some organisations an advantage over other organisations. The EC press release states that case law from EU Courts “makes clear that an exemption from an anti-avoidance provision can amount to such a selective advantage”.
The EC states that, whilst the general purpose of the UK’s CFC rules is to prevent companies using a subsidiary based in a low or no tax jurisdiction to avoid UK taxation, the Finco exemption allows financing of a foreign group whilst paying little or no tax in the UK or overseas. They contrast this with other types of income artificially shifted to offshore subsidiaries of UK parent companies, which remain subject to a CFC inclusion.
Currently no specific companies have been named but this latest development, which follows fast on the heels of other state aid investigations in Ireland, Luxembourg and the Netherlands, will be of significant interest for the many UK businesses that have applied the exemption.
While no timescale is set for the review, the EC press release states that EU competition law and state aid rules will apply in full to the UK until it is no longer a member of the EU.
A more comprehensive article on this matter will be published in next week’s Tax Matters Digest.
The EC press release can be found here.
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