General Court dismisses the UK’s CFC FinCo state aid application
This upholds the Commission’s ruling that the UK CFC FinCo exemption as it stood prior to 1 January 2019 constituted illegal state aid
This upholds the Commission’s ruling that the UK CFC FinCo exemption as it stood prior
In April 2019, the European Commission (EC) ruled that the UK controlled foreign company (CFC) finance company (FinCo) regime constituted state aid for the period from 1 January 2013 to 31 December 2018 in cases where there are UK significant people functions in respect of the loan. The UK Government and several affected taxpayers applied to the European General Court (EGC) for the EC’s ruling to be annulled. However, on 8 June 2022, the EGC issued its judgment dismissing this application in full. This article provides brief commentary on the reasoning behind this decision and the implications of it.
The EGC rejected all seven arguments advanced by the UK Government and the taxpayer applicants. The seven points are nuanced, and revolve around complex questions of EU state aid law. But the central thread running through the EGC judgment is that the EGC essentially agreed with the Commission that:
- The central objective of the UK CFC rules is to protect the UK tax base by taxing profits arising from UK activities and assets that have been artificially diverted from the UK to a CFC;
- By allowing an exemption for non-trade finance profits arising from UK significant people functions, the FinCo exemption departed from that central objective of the UK CFC rules; and
- It did so in a way that allowed a selective advantage to some companies (that was not available to other companies in comparable scenarios).
It remains to be seen if the UK and/or the taxpayer applicants will appeal the EGC decision to the European Court of Justice (ECJ). (An appeal can be lodged within two months of the decision on a point of law.) However, given the sums at stake, this seems highly likely.
Several other taxpayers have also made separate annulment applications to the EGC, and it remains to be seen to what extent those separate applications will now be continued or withdrawn.
If the EGC decision is appealed, it may be some time until the issues are conclusively determined by the ECJ.
In the interim, HMRC will remain obliged to continue to take steps to recover any unlawful state aid from UK taxpayers for pre-1 January 2019 periods, using the specific statutory powers that were introduced for this purpose from 17 December 2020 allowing HMRC to raise formal charging notices. (This February 2021 Tax Matters Digest article looked at what taxpayers in receipt of such a charging notice should do.)
Please speak to your usual KPMG in the UK contact or one of the contacts listed below for further assistance on this topic.