Advocate General’s opinion released in UK CFC FinCo state aid case

Advocate General Medina recommends annulment of the Commission’s decision that the UK CFC FinCo regime constituted illegal state aid

AG Medina recommends annulment of the Commission’s decision that the UK CFC FinCo regime


In April 2019, the European Commission decided that the UK controlled foreign company (CFC) finance company (FinCo) regime constituted illegal state aid for the period from 1 January 2013 to 31 December 2018 in cases where there were UK significant people functions. The CFC FinCo rules changed from 1 January 2019 and the Commission confirmed that it considers the amended rules to be state aid compliant.

The UK Government and several affected taxpayers applied to the General Court of the European Union for the Commission’s state aid ruling to be annulled for pre 2019 periods. On 8 June 2022, the General Court decided that the Commission’s decision should be upheld.

An appeal against the decision of the General Court was lodged with the Court of Justice of the European Union (CJEU). The hearing took place on 10 January 2024.

The AG opinion

Advocate General (AG) Medina’s opinion was delivered on 11 April 2024 in the appeal (Joined Cases C-555/22 P, C-556/22 P and C-564/22 P UK v Commission and Ors). The AG proposed that the Court of Justice should: (i) annul the Commission’s decision that the UK’s CFC FinCo exemption constituted illegal state aid; and (ii) set aside the judgment of the General Court. If followed, this would be positive for affected taxpayers.

The opinion considered that both the Commission and the General Court erred in law when considering that the CFC rules, instead of the general UK corporation tax (CT) system as a whole, were the correct reference framework for examining whether a selective advantage had been granted. The CFC rules were an integral part of the UK's broader CT rules and its approach to territoriality. Such an error in determining the reference framework would vitiate the whole of the selectivity analysis.

The AG highlighted that it is, in principle, for each Member State to exercise their fiscal autonomy, and the Commission must accept the characteristics and principles explicit in those domestic provisions. The Commission failed to demonstrate that the characterisation provided by the UK is manifestly incompatible with the purpose, the constitutive elements and the structure of the CFC rules and the general CT system.

The AG’s opinions are intended to be non-binding and independent, produced for the benefit of the court. The CJEU may follow or depart from the AG’s reasoning. That said, the AG indicates the direction in which she considers the CJEU should go. The AG considers that the conclusion of the General Court in relation to step one of the state aid analysis, being the definition of the reference framework, is ‘unlikely’ to be upheld by the CJEU. Interestingly, there have been other state aid cases recently (such as joined cases C-451/21 P and C-454/21 P in relation to Luxembourg and intra-group financing structures) where the CJEU has found the Commission and General Court to have incorrectly determined the reference system, so the selectivity analysis was vitiated and the CJEU annulled the Commission’s Decision (for more information see this Euro Tax Flash from KPMG’s EU Tax Centre).

A number of multinationals will be watching the progress of this case where they have received charging notices and paid sums over to HMRC in respect of the purported state aid. Should the CJEU follow the AG’s opinion and annul the Commission’s decision, those sums should be returned to the affected taxpayers. The statutory provisions brought in for the recovery of unlawful state aid in TIOPA 2010 indicate that, where the decision is annulled or revoked, the Treasury must bring in regulations to provide for any company affected to be put into the position it would have been otherwise.