On the 2nd April 2019 the European Commission concluded its high-profile investigation into a UK tax scheme for the intra-group financing of multinationals. The investigation was opened in October 2017 and is a way of ensuring that all companies "pay their fair share of tax". Subject to the investigation were certain UK exemptions on the application of tax avoidance rules to multinationals, which at the time were deemed to potentially fall foul of the EU's state aid regime.

The UK has used controlled foreign company rules to prevent companies established within the UK from using a subsidiary based in a low or no tax jurisdiction to avoid paying tax to HM Revenue & Customs. All profits made while using such a structure will allow the tax authorities to reallocate those profits which were moved to an offshore subsidiary (in the absence of a valid economic purpose) back to the UK mother company. Those profits will then be liable to tax in the UK.

However, the UK's Group Financing Exemption exempts from reallocation to the UK interest payments on loans received by an offshore subsidiary from another foreign group company. Therefore, a triangular relationship between the UK parent, the offshore subsidiary and another foreign group company could be set up in order to ensure that little to no tax is paid on the financing arrangement reached between the subsidiary and the foreign group company.

The European Commission concluded that the exemption from CFC rules granted a selective advantage to certain companies active within the UK in a scenario where: (i) the financing income from a foreign group company, and channelled through an offshore subsidiary, (ii) derives totally or partially from UK-based activities.

Hence, the exemption granted on the two bases cited above ("the UK-activities test") fell foul of article 107 TFEU and the entities involved will likely have to reimburse authorities up to the amount they benefitted from.