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Commission investigation into UK tax arrangements

  • United Kingdom
  • Competition, EU and Trade
  • State aid
  • Tax planning and consultancy
  • Diversified industrials

26-10-2017

The European Commission opens an in-depth State aid investigation into the UK’s tax scheme exemption for multinationals

What is the focus of the Commission’s investigation?

The investigation will focus on the UK’s Group Financing Exemption scheme. This was introduced under the Finance Act 2012, which came into force on 1 January 2013, and provides an exemption for certain transactions of multinational groups from the Controlled Foreign Company (CFC) rules.

The CFC rules seek to prevent UK companies from using a subsidiary in a low or no tax jurisdiction so as to avoid taxation in the UK. More specifically, these rules allow HMRC (the UK’s tax authority) to apportion profits which were deemed to have been artificially shifted to an offshore subsidiary back to the UK so that they may be taxed accordingly.

As of 1 January 2013, the CFC rules provide for the Group Financing Exemption. This essentially exempts from UK taxation financing income (interest payments received from loans) received by an offshore subsidiary from another foreign group company.

Why has the Commission opened this investigation?

The Commission is concerned that the effect of the Group Financing Exemption is to allow multinational groups active in the UK to provide financing to another group company based outside the UK via an offshore subsidiary with the result that:

  • the offshore subsidiary’s financing income is not (or is not fully) reallocated to the UK for taxation purposes (as it may have been, had the Group Financing Exemption not applied);
  • the offshore subsidiary pays little or no tax on the financing income in the jurisdiction in which it is based.

The European Commission is concerned about the compatibility of these arrangements with EU State aid rules.

Why are the EU State aid rules relevant here?

In brief, EU State aid rules seek to ensure that State resources are not used in ways which distort or threaten to distort competition in the internal market by providing an advantage to certain businesses only (often referred to as a “selective advantage”).

Income which the State foregoes as a result of an exemption from a general tax rule would in principle constitute State resources and would, therefore, be capable of giving rise to concerns under the EU State aid rules.

The Commission is concerned that the Group Financing Exemption might be incompatible with EU State aid rules and to that end, has drawn attention to the fact that EU Courts have already established that an exemption from tax avoidance legislation can amount to a selective advantage under EU State aid rules.

If the Commission concludes that the arrangement amounts to illegal State aid it would normally require the UK to recover the “aid” (the amount of tax that should have been paid had the exemption not applied) from the beneficiary companies.

But what about Brexit?

Although the UK gave notice to the European Council of its decision to withdraw from the EU on 29 March 2017, the rules provide for a two-year period within which to negotiate that withdrawal. Until that period expires, the UK continues to be subject fully to the rights and obligations of EU membership.

In-depth investigations are usually long (see below) and there is, therefore, a question mark as to the extent to which the Commission’s decision, following the investigation, may be binding on the UK after Brexit.

At the same time, it is possible that a Commission decision may be binding on the UK, even after Brexit, as a result of EU-UK transitional arrangements.

What is the context here?

The Commission has been investigating the EU State aid law compliance of various individual tax rulings and tax schemes of EU Member States since June 2013. The Commission has made it clear that further State aid tax-related investigations are on the way.

An in-depth State aid investigation follows a preliminary investigation in circumstances where the latter has led to the Commission having doubts as to the compatibility of a State aid measure with EU law.

The starting point is that an in-depth investigation may take up to 18 months to be completed. However, this rule does not apply to cases – such as this – where the Commission considers that a State measure might constitute aid which should have been notified to it for clearance but was not. Accordingly, in theory, the Commission may take much longer than 18 months to complete its investigation.

Interested parties wishing to submit comments to the Commission may do so, normally within a period of one month from the time of the publication of the decision to open the in-depth investigation.

It is expected that the Commission’s decision to open such investigation in this case will be published shortly.

How can we help you?

If you would like to discuss with us the likely impact of the investigation on your business and what you might do to protect your position please contact our specialists, Totis Kotsonis, competition lawyer and State aid expert, and Ben Jones, tax law expert, via the contact details below.

 

For more information contact

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