Belgium State Aid Tender

The European Commission has found that a UK tax scheme is partly justified and does not constitute State aid insofar as it ensures the proper functioning and effectiveness of the relevant tax rules.However the Commission found that the scheme unduly exempted certain multinational groups from these UK rules targeting tax avoidance. This is illegal under EU State aid rules. The UK must now recover the illegal State aid from the multinational companies that benefitted from it.Commissioner Margrethe Vestager in charge of competition policy said Antitax avoidance rules are important to ensure that all companies pay their fair share of tax. But they must apply equally to all taxpayers. The UK gave certain multinationals a selective advantage by granting them an unjustified exemption from UK antitax avoidance rules. This is illegal under EU State aid rules. The UK must now recover the undue tax benefits.Controlled Foreign Company CFC rulesThe general purpose of the UKs Controlled Foreign Company 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 allow the UK tax authorities to reallocate all profits artificially diverted to an offshore subsidiary back to the UK parent company where it can be taxed accordingly.CFC rules in general are an effective and important feature of many tax systems to address tax avoidance. UK CFC rules establish two tests to determine how much of the financing profits from loans granted by an offshore subsidiary are to be reallocated to the UK parent company and hence taxed in the UK CFC charge namelyThe extent to which lending activities which are most relevant to managing the financing activities and thus generating the financing income are located in the UK UK activities test orThe extent to which loans are financed with funds or assets which derive from capital contributions from the UK UK connected capital test.Between 2013 and 2018 the UKs CFC rules included a special rule for certain financing income i.e. interest payments received from loans of multinational groups active in the UK the Group Financing Exemption.The Group Financing Exemption provided a derogation from the general CFC rules. It partially 75 or fully exempted from taxation in the UK financing income received by an offshore subsidiary from another foreign group company even if this income is derived from UK activities or the capital being used is UK connected. Therefore a multinational active in the UK using this exemption was able to provide financing to a foreign group company via an offshore subsidiary paying little or no tax on the profits from these transactions.The Commissions State aid investigation does not call into question the UKs 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 case law of the EU Courts makes clear that an exemption from an anti-avoidance provision can amount to such a selective advantage. The Commissions investigationIn October 2017 the Commission opened an in-depth investigation to verify whether the Group Financing Exemption complied with EU State aid rules.The Commissions investigation has concluded that the Group Financing Exemption and hence the different treatment was partially justified. At the same time the exemption grants a selective advantage to certain multinational companies.Financing with UK connected capital UK connected capital test.In particular the Commission found that when financing income from a foreign group company channelled through an offshore subsidiary is financed with UK connected capital and there are no UK activities involved in generating the finance profits the Group Financing Exemption is justified and does not constitute State aid under EU rules.This is because such an exemption avoids complex and disproportionately burdensome intra-group tracing exercises that would be required to assess the exact percentage of profits funded with UK assets. The Commission therefore acknowledges that in line with UK arguments the Group Financing Exemption in these cases provides for a clear proxy that is justified to ensure the proper functioning and effectiveness of the CFC rules.Managing the financing activities from the UK UK activities testConversely the Commission found that when financing income from a foreign group company channelled through an offshore subsidiary derives from UK activities the Group Financing Exemption is not justified and constitutes State aid under EU rules.This is because the exercise required to assess to what extent the financing income of a company derives from UK activities is not particularly burdensome or complex. Thus the use of a proxy rule in these cases is not justified. Moreover the Group Financing Exemption does not seek to address any possible complexity related to the allocation of financing income to UK activities nor has the UK claimed it does.