State aid: Commission opens in-depth investigation into UK tax scheme for multinationals

The European Commission has opened an in-depth investigation into a UK scheme that exempts certain transactions by multinational groups from the application of UK rules targeting tax avoidance (the UK CFC rules). It will investigate if the scheme allows these multinationals to pay less UK tax, in breach of EU State aid rules. Commissioner Margrethe Vestager 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.” The general purpose of the UK CFC rules is to prevent UK companies from using a subsidiary, based in a low or no tax jurisdiction, to avoid taxation in the UK. They reallocate income artificially shifted to offshore subsidiaries of UK parent companies to the UK for taxation. CFC rules in general are an effective and important feature of many tax systems to address tax avoidance. However, since 2013, the UK CFC rules include an exception for certain financing income (i.e. interest payments received from loans) of multinational groups active in the UK – the Group Financing Exemption. At this stage, the Commission has doubts whether this exemption complies with EU State aid rules. In particular, the Commission has doubts whether this exemption is consistent with the overall objective of the UK CFC rules. The Commission’s State aid investigation does not call into question the UK’s right to introduce CFC rules or to determine the appropriate level of taxation. The role of EU State aid control is to ensure Member States do not give some companies a better tax treatment than others. The opening of an in-depth investigation gives the UK and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation. The full press release is available online in ENFRDE.