The United Kingdom's anti-tax optimisation rules, referred to as the 'rules on controlled foreign companies', are believed to contain exemptions that run counter to EU rules on state aid.
These rules, currently in place in 19 EU countries, allow member states in which the parent company of a business is headquartered to reallocate to itself, and therefore tax, the profits this parent places into a controlled foreign company (CFC) in a low-tax country.
On Thursday 26 October, the European Commission announced that it had opened an investigation to verify its suspicions concerning the group financing exemptions under the British rules on CFCs. The UK exempts financing revenue received by offshore subsidiaries from other foreign companies of the group from being reallocated to the UK, and therefore from being taxed on its territory. This means that multinationals in the UK may finance a foreign company of the group through an offshore subsidiary. Under this exemption, it will pay little or no tax on the profits generated by these operations, as the offshore subsidiary pays little or no income tax in the country in which it is established and its income is also not reallocated (or only partially) to the UK in order to be taxed there.
According to EUROPE's information, the Commission started to take an interest in this exemption after seeing a reference to it in the press. The changes made to the rules on CFCs in the UK were introduced in 2013, but announced in 2011 and caused uproar among civil society, which denounced its loopholes.
The Commission has yet to receive any information from the UK regarding this dossier; nor does it know how many companies may have benefited from the exemption, but stresses that it appears to be applied fairly broadly.
A Commission source moreover stressed that from 2019, when the anti-tax avoidance directive enters into force, the UK will be obliged to abolish any exemptions provided for under its current rules. The directive provides for a minimum standard on CFCs, but no exemptions. As it is a de minimis rule, European countries may not go beyond what is set out in the directive.
However, if negotiations conclude in time, the UK will leave the EU in March 2019 and previous Commission investigations into state aid in the field of taxation have taken many months. Hence the question: will the Commission have a binding opinion? One thing is certain: if an undue advantage has been granted to companies whilst the UK was a member state, this advantage must be recovered (if the exemption is ultimately ruled to run counter to EU state aid rules). There is, however, no certainty on anything else at this stage. (Original version in French by Élodie Lamer)