EU General Court confirms CFC exemption is state aid
In UK and ITV plc v European Commission (Cases T-363/19 and T-456/19) (8 June 2022), the EU General Court upheld the decision of the Commission that the controlled foreign companies (CFC) group financing exemption, as it applied before 2019, constituted state aid.
The Commission published the results of its state aid investigation into the UK’s CFC group financing exemption (TIOPA 2010 Part 9A Chapter 9) in April 2019. It found that the exemption constituted state aid to the extent that it applied to non-trading finance profits from qualifying loans where the decision-making functions were in the UK (i.e. where TIOPA 2010 s 371EB applied). The exemption was not state aid, however, where the profits arose from UK funds or assets (TIOPA 2010 s 371EC) and s 371EB did not apply.
The UK government applied to the General Court to annul the Commission’s decision. An application was also made by ITV and other companies who were subject to recovery notices requiring them to repay the state aid received. The General Court rejected all of the arguments raised by the UK government and ITV and so upheld the Commission’s decision. It held that the Commission had not made any errors in concluding that the exemption provided an advantage and that the advantage was selective, since it introduced a difference in treatment between companies in a comparable situation. In particular, there was a difference in treatment between CFCs making qualifying loans (to non-UK companies) and those making ‘upstream loans’ (to UK companies) which did not qualify for the exemption. In both cases, there was an artificial diversion of profits from the transfer of funds to the CFC, and the CFC’s profits would be repatriated to the UK in the form of non-taxable dividends. The ability of UK companies which were beneficiaries of loans to obtain a deduction for the interest payable was a separate problem which could be managed by other measures limiting deductions.
The General Court went on to consider whether there was a justification for the exemption. The UK argued that the exemption was justified by the need to make the CFC system administrable due to the difficulty in identifying the decision-making functions in the context of intra-group loans. However, the court ruled that the UK had not provided any evidence to quantify the administrative costs that would be involved and so rejected the argument. The court also rejected the UK’s argument that the exemption was justified in that it was aimed at compliance with freedom of establishment.
Why it matters: Although the tax rules in dispute were amended for 2019 onwards, the decision in this case will come as a disappointment both to the UK government and affected multinationals. It remains to be seen whether the government will appeal to the CJEU but even if it does not, this will not be the end of the matter for affected businesses. One of ITV’s arguments was that it in fact achieved no tax advantage from its arrangements. The General Court held that the Commission was not required to consider individual cases and so ITV could not challenge its decision on that basis. But the quantification of the tax advantage (and so of the amount of state aid to be recovered) will likely be the subject of further litigation.
Commenting on the decision, Dan Neidle (Tax Policy Associates), said this was ‘a very poor quality General Court judgment.’
‘The problem with the Commission's challenge was always that the treasury company exemption was “less generous” than the minimum the CJEU had said was permitted in the Cadbury Schweppes case (C‑196/04),’ Neidle said. ‘[So] how did the General Court deal with this? By reading a concept of “artificially diverted” into the UK CFC rules which isn't actually there.’
‘The UK should appeal and, if the CJEU takes its own caselaw seriously, the UK will win,’ Neidle added. (See also page 6.)
EU General Court confirms CFC exemption is state aid
In UK and ITV plc v European Commission (Cases T-363/19 and T-456/19) (8 June 2022), the EU General Court upheld the decision of the Commission that the controlled foreign companies (CFC) group financing exemption, as it applied before 2019, constituted state aid.
The Commission published the results of its state aid investigation into the UK’s CFC group financing exemption (TIOPA 2010 Part 9A Chapter 9) in April 2019. It found that the exemption constituted state aid to the extent that it applied to non-trading finance profits from qualifying loans where the decision-making functions were in the UK (i.e. where TIOPA 2010 s 371EB applied). The exemption was not state aid, however, where the profits arose from UK funds or assets (TIOPA 2010 s 371EC) and s 371EB did not apply.
The UK government applied to the General Court to annul the Commission’s decision. An application was also made by ITV and other companies who were subject to recovery notices requiring them to repay the state aid received. The General Court rejected all of the arguments raised by the UK government and ITV and so upheld the Commission’s decision. It held that the Commission had not made any errors in concluding that the exemption provided an advantage and that the advantage was selective, since it introduced a difference in treatment between companies in a comparable situation. In particular, there was a difference in treatment between CFCs making qualifying loans (to non-UK companies) and those making ‘upstream loans’ (to UK companies) which did not qualify for the exemption. In both cases, there was an artificial diversion of profits from the transfer of funds to the CFC, and the CFC’s profits would be repatriated to the UK in the form of non-taxable dividends. The ability of UK companies which were beneficiaries of loans to obtain a deduction for the interest payable was a separate problem which could be managed by other measures limiting deductions.
The General Court went on to consider whether there was a justification for the exemption. The UK argued that the exemption was justified by the need to make the CFC system administrable due to the difficulty in identifying the decision-making functions in the context of intra-group loans. However, the court ruled that the UK had not provided any evidence to quantify the administrative costs that would be involved and so rejected the argument. The court also rejected the UK’s argument that the exemption was justified in that it was aimed at compliance with freedom of establishment.
Why it matters: Although the tax rules in dispute were amended for 2019 onwards, the decision in this case will come as a disappointment both to the UK government and affected multinationals. It remains to be seen whether the government will appeal to the CJEU but even if it does not, this will not be the end of the matter for affected businesses. One of ITV’s arguments was that it in fact achieved no tax advantage from its arrangements. The General Court held that the Commission was not required to consider individual cases and so ITV could not challenge its decision on that basis. But the quantification of the tax advantage (and so of the amount of state aid to be recovered) will likely be the subject of further litigation.
Commenting on the decision, Dan Neidle (Tax Policy Associates), said this was ‘a very poor quality General Court judgment.’
‘The problem with the Commission's challenge was always that the treasury company exemption was “less generous” than the minimum the CJEU had said was permitted in the Cadbury Schweppes case (C‑196/04),’ Neidle said. ‘[So] how did the General Court deal with this? By reading a concept of “artificially diverted” into the UK CFC rules which isn't actually there.’
‘The UK should appeal and, if the CJEU takes its own caselaw seriously, the UK will win,’ Neidle added. (See also page 6.)
