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EUROPE: Commission publishes argument against UK's CFC exemption

On 16 November 2017, the European Commission released a non-confidential version of its decision to open a formal investigation into the UK’s controlled foreign company (CFC) regime. The Commission had previously announced its 26 October decision declaring a preliminary finding of State aid pursuant to Article 107(1) TFEU.

The Commission’s preliminary finding is that the group financing exemption under the CFC rules, contained in Chapter 9 of Part 9a TIOPA, conflicts with the provisions of State aid. The group financing exemption allows for certain non-trading profits that meet at least one of four tests can be either partially or fully exempt for CFC charge.

The focus of the Commission is establishing selective advantage. The Commission believes that the group financing exemption is a derogation from the reference framework (CFC regime).  Allowing certain companies to be exempt from the CFC charge contradicts the purpose of the CFC regime, which is to ensure the taxation of profits which are artificially diverted from the UK into UK controlled non-resident associated entities, the Commission said.

As the Commission continues to use of State aid as a tool to clamp down on its Member States taxing rights, it will be interesting to see what legal arguments the UK authorities put forward. It would appear difficult to reconcile any differentiation in tax treatment against the purpose of the CFC regime.