On 2 April 2019, the European Commission (EC) announced that the UK’s controlled foreign company (CFC) regime exemption for certain finance income amounted (in part) to illegal state aid. Then, on 25 April 2019, the EC published its full decision in this case.
The UK’s CFC regime was amended with effect from 1 January 2019, therefore the EC’s decision should only relate to the period from January 2013 (when the CFC regime was updated) to December 2018. This was confirmed in the EC’s press release of 2 April.
The CFC regime from 2013 introduced a “group finance exemption” (GFE). The GFE, broadly, provided for a full or partial (75%) exemption from the CFC charge for finance income received by a non-UK subsidiary of a UK company from another non-UK group company. The GFE could apply even if the financing income in question derived from UK activities, or the funds to finance the loan(s) derive from UK capital contributions.
In the EC’s press release, Commissioner Vestager was quoted as saying that, through the GFE, the UK “gave certain multinationals a selective advantage by granting them an unjustified exemption…”.
The EC made a distinction between (1) loans between non-UK subsidiaries of a UKheadquartered group, where the finance income derives from UK activities (in which case the GFE in the EC’s view amounted to illegal state aid), and (2) loans between non-UK subsidiaries of a UK-headquartered group, where the finance income does not derive from UK activities (in which case the GFE was justified in the EC’s view).
It remains to be seen whether the UK government will appeal the EC’s decision but HMRC is now required to recover underpaid tax for the 2013-2018 period which, it has been estimated, could amount to more than £1bn in total.