The European Commission found on Tuesday 2 April that a UK tax scheme had exempted certain multinational companies from the application of UK rules targeting tax avoidance and called on London to recover this illegal state aid under EU law.
The purpose of the UK Controlled Foreign Company (CFC) rules is to combat tax evasion by domestic companies using a subsidiary established abroad. The Commission underlines that these rules are, in general, effective in combating tax avoidance.
However, from 2013 to 2018, the institution found that these CFCs included a specific regime for certain financing income, i.e. interest payments received from loans, i.e. Group Financing Exemptions. This scheme partially or totally exempted from UK tax financing income obtained by an offshore subsidiary from another foreign company of the group. Thus, a multinational company based in the United Kingdom could provide financing to a foreign company of the same group through an offshore subsidiary and be exempt from tax on such transactions.
Fearing that the scheme would be incompatible with EU state aid rules, the Commission opened an in-depth investigation in October 2017 (see EUROPE 11892/9).
While the institution partially approved this scheme, it considered that the exemption granted a selective advantage to certain multinational companies. Where financing income from a foreign company in the group derives from activities carried out in the United Kingdom, the Commission considers that this exemption on group financing cannot be justified and constitutes unlawful State aid in the light of the rules of Union law. This is because the operation necessary to assess the extent to which such income derives from activities carried out in the United Kingdom is neither binding nor complex.
Consequently, the institution concluded that multinationals applying for this exemption and meeting the 'activities test' in the United Kingdom had received unjustified preferential tax treatment.
For this reason, it asked London to put an end to this practice and to recover the sums corresponding to this State aid, the amount of which has not been communicated. (Original version in French by Lucas Tripoteau)