UK: EC erred in finding illegal State aid based on controlled foreign company rules in isolation

The Advocate General of the Court of Justice of the European Union (CJEU) today issued an opinion that the decision of the European Commission (EC) finding that the United Kingdom granted illegal tax rulings to certain multinational enterprises (MNEs) between 2013 and 2018 be annulled, because both the EC erred in determining that the UK controlled foreign company (CFC) rules, instead of the general UK corporation tax system as a whole, were the correct reference framework for examining whether a selective advantage had been granted.

The joined cases are: United Kingdom v. Commission and Others (C-555/22 P, C-556/22 P, and C-564/22 P)

As explained in a release from the CJEU, the EC on 2 April 2019 found that the UK granted illegal State aid to certain MNEs between 2013 and 2018 by unduly granting them an exemption from the UK CFC rules available for certain financing income of MNEs active in the UK. The UK and one of the taxpayers challenged the EC decision before the General Court, but that court dismissed their actions on 8 June 2022. The UK and two other taxpayers then appealed to the CJEU.

The Advocate General today issued an opinion concluding that the EC and the General Court erred in determining that the CFC rules constituted the correct reference framework for examining whether a selective advantage had been granted. Instead, the correct reference framework ought to have been the general UK corporation tax system. The CFC rules form part of that system and cannot be severed from it. Indeed, the CFC rules can only be fully understood when considering the UK corporate tax system as a whole. 

KPMG observation

The Advocate General’s opinion is not binding on the CJEU. The role of the Advocates General is to propose to the court, a legal solution to the cases for which they are responsible. The CJEU judges will now begin their deliberations in this case with a judgment to be given at a later date.