Commission State Aid Enquiry – UK CFC Provisions

23 November 2017
Author: JHA

On 16 November the Commission published its preliminary decision, available here, that the group financing exemptions (GFE) within the UK’s CFC provisions (chapter 9 of Taxation (International and Other Provisions) Act 2010) constitute state aid. The Commission sees the reference system as the CFC provisions. In the Commission’s view the objective of the UK system

is to tax income artificially diverted from the UK which, in the case of non-trading financing income, meets the criteria within the chapter 5 gateway. The GFE acts as a derogation in that it exempts certain groups that fall within that gateway. It rejects the UK’s argument that the exemptions in chapter 9 are merely an additional filter forming part and parcel of the reference

The Commission regards the GFE as selective because it is only available to non-trading financing income within the chapter 5 gateway which is derived from qualifying loan relationships, that is essentially loans to related companies that are not UK resident and not attributable to a UK PE. The comparator appears therefore to be a group with financing income where the loans are to the UK or a third party. The Commission does not regard it as consistent with the logic of the system to distinguish income which does not have the effect of creating a UK interest deduction from that which does. The partial exemption is additionally regarded as disproportionate.

No reference is made to Cadbury Schweppes or the principles it established even though that case also concerned financing income and the GFE requires the genuine establishment of the CFC.

The publication of the preliminary decision opens the 30 day period for interested parties to make submissions to the Commission.

This article appears in the JHA November 2017 Tax Newsletter, which also features:


  1. 2017 Budget – Cross Border Issues
  2. A Oy – immediate taxation of capital gains of non-resident PE
  3. Advocate General finds Dutch tax consolidation regime to infringe the freedom of establishment
  4. Belgian rules limiting interest deduction to the extent of dividends received
  5. Jacobs v French Minister for Finance and Public Accounts (C-327/16)
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