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UK Government challenges the European Commission's State aid ruling on the UK's CFC regime

27 June 2019

The UK Government has lodged an annulment application to the General Court in respect of a recent EC decision which found certain parts of the CFC Group Financing Exemption gave rise to unlawful State aid.

According to reports, the UK lodged an appeal with the General Court on the 12 June 2019 against the European Commission decision of 2 April 2019, which found that certain parts of the UK's Controlled Foreign Company ("CFC") regime breached EU State aid rules.


CFC Regime and the EC decision

The UK's CFC rules were designed to prevent companies in the UK avoiding or deferring taxes by shifting profits to subsidiaries in low tax jurisdictions. The CFC rules operate by making certain profits of overseas subsidiaries to UK tax. Between 1 January 2013 and 31 December 2018, the CFC rules included a tax exemption called the Group Financing Exemption ("GFE") that provided a full or partial (75%) exemption for finance income (interest payments received from loans) between non-UK members of a corporate group.

In the April decision, the Commission found that the GFE regime gave certain multinationals a selective and unjustified advantage to UK parent companies with subsidiaries based in non-UK jurisdictions. The Commission ordered the UK to effect full recovery of the unlawful State aid awarded under the regime.


UK's annulment application

The Government has not yet published its annulment application to the General Court, but it has made available a summary of the technical arguments against the decision which were put forward in the annulment application, including:

  • The GFE is not an exception to the general CFC regime as it applies to non-trading finance profits (NTFP), but instead an integral part of identifying NTFP that have been artificially diverted from the UK;
  • The UK does not agree that CFCs with qualifying loan relationships are in comparable legal and factual situations to CFCs with other forms of financing arrangements and that there are different risks associated with third party loans compared to intra-group loans;
  • The EC’s assertion that the UK connected capital test is an acceptable derogation on the basis that it provides for a more easily administrable regime is equally applicable to the UK activities test;
  • The UK’s CFC regime was reformed in 2013 following the Cadbury Schweppes ruling in order to make it compliant with EU Fundamental Freedoms and the EC decision undermines this; and
  • The UK has a certain level of discretion in exercising their competence in the field of direct taxation and the CFC regime is within this.


Businesses affected by the EC decision

The number of companies affected by the Commission's ruling is believed to be over 50, and their joint tax liabilities could be as much as £1.35bn according to analysis by Bloomberg Tax. Such companies that are potentially affected by the ruling may have their own grounds for bringing an annulment application, outside of those grounds raised by the UK Government. Since there is a risk that affected groups may be unable to rely on EU defences at the domestic enforcement stage in the UK unless those grounds have been directly raised at the EU level, affected businesses have begun to prepare separate applications to challenge the EC’s decision in order to fully protect their position. It has been reported that at least 14 companies have filed appeals with the EU General Court, including BT, GSK and Vodafone.



The UK Government has refused to accept the Commission's finding of unlawful State aid and sought to challenge the basis for the decision in the General Court. It remains to be seen whether the UK will be successful, but in the meantime the UK government remains subject to the recovery order causing uncertainty for those who benefited under the tax measure

Further Reading