Court of Justice’s judgment released in UK CFC Finco State aid case

Court of Justice annuls the European Commission’s decision that the UK CFC Finco regime constituted State aid

Court of Justice annuls the European Commission’s decision that the UK CFC Finco regime

26 September 2024

3 min read

Background

In April 2019, the European Commission ruled that the UK controlled foreign company (CFC) group financing exemption (FinCo) regime constituted State aid incompatible with the internal market and had been unlawfully put into effect by the UK for the period from 1 January 2013 to 31 December 2018. The UK CFC FinCo rules were changed from 1 January 2019 and the Commission confirmed that it considered 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 upheld the Commission’s ruling.

An appeal against the decision of the General Court was lodged with the European Court of Justice (CJEU).

The Advocate General’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). Advocate General Medina proposed that the CJEU should: (i) annul the Commission’s ruling; and (ii) set aside the judgment of the General Court.

Lee Ellis

Partner, KPMG Law

KPMG in the UK

Profile | | Phone

Nicola Hine

Director, Solicitor, KPMG Law

KPMG in the UK

Profile | | Phone

The CJEU’s judgment

The CJEU’s judgment was handed down on 19 September 2024. The CJEU broadly followed the Advocate General’s opinion, setting aside the judgment of the General Court and annulling the Commission’s ruling.

The CJEU considered that the Commission and the General Court had erred in law when considering that the CFC rules set out in Part 9A of TIOPA 2010, instead of the general UK corporation tax system (GCTS) as a whole, were the correct reference framework for examining whether a selective advantage had been granted, i.e., whether the national measure was such as to favour certain undertakings over others in a comparable factual and legal situation.

This error vitiated the whole of the Commission’s (and General Court’s) analysis as to the existence of a selective advantage. This meant the CJEU did not need to consider the other issues in the appeal, including any justification for the contested scheme of aid by the need to enable administrative practicability of the CFC rules or the need to respect freedom of establishment. The CJEU emphasised the particular importance of determining the reference framework in the case of tax measures, since the existence of an economic advantage for the purposes of the State aid rules may be established only when compared with ‘normal’ taxation.

The CJEU held that the Commission had not been able to establish that the UK’s interpretation of the CFC’s rules and their relationship with the GCTS was wrong. Accordingly, the CJEU found that the rules applicable to CFCs, taken as a whole and in particular, as regards non-trading finance profits, supplemented the GCTS, and followed the same logic which is largely based on the principle of territoriality in the sense that the CFC charge was not, or was not fully, applied where the risk of artificial diversion of profits or the erosion of the UK corporation tax base was not sufficiently high.

Impact on affected taxpayers

A number of multinationals will be watching the progress of this case, having received charging notices and paid sums over to HMRC in respect of the purported State aid. It will now be for the UK Government to bring forward legislation (by way of regulations) to put those affected by the legislation that clawed back the purported State aid into the position they would have been in.

Affected companies, including those who have open enquiries, may now wish to consider their position with their advisers, including consideration of the scope and status of such enquiries, and whether any regulations published in due course meet the objective stated in the primary legislation.

For further information please contact:

Court of Justice’s judgment released in UK CFC Finco State aid case

Background

The CJEU’s judgment

Impact on affected taxpayers

Tax Matters Digest

Tax Matters Digest