Tax clawback from groups using UK CFC finance exemption

Tax clawback from groups using UK CFC finance exemption

Thu 27 Jun 2019

HM Treasury has advised professional bodies that it is has applied to the EU Courts for an annulment of  the European Commission’s (EC’s) conclusion into its state aid investigation into the UK CFC finance exemption provisions.

The Commission has ordered the UK to recover aid from the taxpayers that allegedly benefitted from it between 1 January 2013 and 31 December 2018, noting that changes made in Finance Act 2019 and effective from 1 January 2019 mean that the exemption no longer gives rise to unlawful aid.

Despite the UK’s application for annulment, it must nonetheless  start recovering the aid from affected taxpayers in line with the Commission’s decision within four months of the future date on which the EC decision is published in the Official Journal of the EU.

Groups affected by the decision may have their own reasons for disagreeing with the EC’s decision and may consider whether they themselves should take any legal action.  For further advice, please get in touch with a member of the Mazars International Tax team.

The reasons for the UK’s disagreement with the EC’s decision

The reasons for the UK Government’s disagreement with the EC’s decision are:

  • The decision is based on a misunderstanding of how the UK’s CFC provisions work.
  • The finding of State aid relies on the mistaken view that CFCs with qualifying loan relationships are in a comparable legal and factual situation to CFCs involved in other forms of financing arrangements.
  • Whilst the government does not agree that provisions contained within Chapter 9 are prima facie selective and in need of justification, any justification on administrative grounds would have as much relevance to a significant people function analysis as it would to the determination of the origin of capital.
  • The decision underplays the uncertainty created by the Cadbury Schweppes ruling, and the difficult balance that the UK had to achieve in 2013 in designing a robust, administrable and proportionate regime that was nonetheless compliant with the EU Fundamental Freedoms.
  • The decision fails to afford the UK an appropriate margin of discretion in this case and fails to recognise that, in exercising their competence in the field of direct taxation, Member States need to make complex judgements regarding the detailed legislative approach to tackling avoidance, taking account of their circumstances and their understanding or assessment of different risks.