The European Commission has found that a UK tax scheme, while partially legitimate, contains exemptions which are illegal under state aid rules.
The Controlled Foreign Company (CFC) rules, aimed at preventing companies based in the UK from avoiding paying UK taxes by establishing a subsidiary in a low- or no-tax region, allows authorities to redivert profits which had been paid into offshore subsidiary accounts back into the parent company’s UK accounts, from which the appropriate amount of tax could be extracted. Between 2013 and 2018, the UK introduced the Group Financing Exemption, which allowed multinational companies operating in the UK to transfer profits to a foreign parent company via offshore subsidiaries with partial or full exemptions from paying tax in the UK.
The Commission’s investigation found that the Group Financing Exemption was justified under EU state aid rules where income from a group company based overseas was financed with UK connected capital but no UK-based activities had taken place generating the financial profits. Arrangements of this nature were found to avoid the “complex and disproportionately burdensome” tracing exercises which would otherwise be necessary to determine the profits deriving specifically from UK funds.
Where income from a foreign group company channelled through offshore subsidiaries was derived from activities in the UK, however, the Commission declared that the tracing exercises necessary to determine what proportion of the profits had their roots in the UK were not excessively burdensome; and so the Group Financing Exemption was not justified in these instances. Multinational companies benefiting from the exemption while conducting activities in the UK, therefore, were found to have benefited from unduly preferential tax treatment.
Margrethe Vestager, Commissioner in charge of competition policy, said: “Anti–tax avoidance rules are important to ensure that all companies pay their fair share of tax. But they must apply equally to all taxpayers. The UK gave certain multinationals a selective advantage by granting them an unjustified exemption from UK anti–tax avoidance rules. This is illegal under EU State aid rules. The UK must now recover the undue tax benefits.”
