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EU Launches State Aid Probe Into UK's Group Financing Exemption

by Ulrika Lomas, Tax-News.com, Brussels

26 October 2017


The European Commission has opened an in-depth probe into the UK's Group Financing Exemption, which exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance.

The probe will investigate if the scheme allows these multinationals to pay less UK tax in a selective manner, which would be in breach of EU state aid rules.

The Exemption is an element of the UK's Controlled Foreign Company (CFC) rules, which are intended to prevent UK companies from using a subsidiary, based in a low or no tax jurisdiction, to avoid taxation in the UK. In particular, they allow the UK tax authorities to reallocate all profits artificially shifted to an offshore subsidiary back to the UK parent company, where it can be taxed accordingly.

In a statement announcing the launch of its investigation, the European Commission noted that, since 2013, the UK's CFC rules have included an exemption for certain financing income of multinational groups active in the UK, known as the Group Financing Exemption. On the reason for announcing an investigation, the Commission stated: "Generally speaking, financing income is often used as a channel for profit shifting by multinationals, given the mobility of capital. The UK's Group Financing Exemption exempts from reallocation to the UK, and hence UK taxation, financing income received by the offshore subsidiary from another foreign group company. Thus, a multinational active in the UK can provide financing to a foreign group company via an offshore subsidiary. Due to the exemption, it pays little or even no tax on the profits from these transactions, because:

  • The offshore subsidiary pays little or no tax on the financing income in the country where it is based; and
  • The offshore subsidiary's financing income is also not (or only partially) reallocated to the UK for taxation due to the exemption.

On the other hand, the CFC rules reallocate other income artificially shifted to offshore subsidiaries of UK parent companies to the UK for taxation."

The Commission confirmed that its investigation is not intended to call into question the UK's right to introduce CFC rules or determine an appropriate level of taxation; instead the EU's probe is intended to determine whether the country is providing selective tax advantages – that is, that the UK is providing similarly situated companies with different levels of taxation in breach of EU rules. "The role of EU state aid control is to ensure member states do not give some companies a better tax treatment than others," the Commission said. "The case law of the EU Courts makes clear that an exemption from an anti-avoidance provision can amount to such a selective advantage."

Margrethe Vestager, the Commissioner in charge of competition policy, said: "All companies must pay their fair share of tax. Anti-tax avoidance rules play an important role to achieve this goal. But rules targeting tax avoidance cannot go against their purpose and treat some companies better than others. This is why we will carefully look at an exemption to the UK's anti–tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU state aid rules."

TAGS: tax | European Commission | value added tax (VAT) | tax avoidance | interest | law | United Kingdom | offshore | multinationals | transfer pricing | European Union (EU) | Europe

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