On 2 April 2019, the European Commission (the “Commission”) concluded that the group finance company exemption from the UK’s controlled foreign company (“CFC”) regime, in respect of finance income that derived from UK activities, constituted illegal state aid for the period from 1 January 2013 to 31 December 2018. During this period the UK was a member of the European Union and from 1 January 2019 the finance company exemption under the CFC rules was amended to bring the exemption into line with the EU Anti-Tax Avoidance Directive 1.

The Commission’s conclusion was based on its view that the finance company exemption gave rise to a selective advantage; namely, that the finance company exemption introduced different tax treatment for companies in comparable situations. The Commission confirmed that the CFC rules, as amended from 1 January 2019, were fully state aid compliant.

In June 2022, the General Court of the European Union (the “GC”) found that the Commission had not made an error of law in its conclusions regarding the UK’s CFC regime.  The decision of the GC was appealed to the Court of Justice of the European Union (“CJEU”).

Advocate General’s Opinion: April 2024

On 11 April 2024, Advocate General Medina handed down an opinion that proposed that the CJEU should annul the Commission’s decision and set aside the judgement of the GC.

Although Advocate General opinions are not binding and are intended to be independent “guidance” for the CJEU, they are indicative of how the Advocate General considers the CJEU should decide its case.  If the CJEU agree with the Advocate General’s opinion and annul or set aside the previous decisions by the Commission and the GC, affected companies might be refunded any amounts that were paid to HMRC in respect of the CFC regime (which would, in that context be illegal state aid) owing to the previous decision of the GC.

A number of companies are understood to have paid tax, or are currently disputing tax assessments, in respect of such CFC liabilities. The Advocate General’s opinion will, therefore,  be of keen interest to affected companies (as well as to the UK Treasury).

The Advocate General’s arguments

The Advocate General’s opinion focusses on the arguments raised by the appellants in three separate cases which have been joined for the purposes of the appeal to the CJEU (the appellants include the UK Government, ITV and the London Stock Exchange) against the decision by the Commission and the GC. The key consideration in the case is which framework should be used in determining whether the UK CFC rules provided a selective advantage. In other words, how is an advantage to be determined? Should the reference be to the UK CFC rules alone, or to the UK’s corporation tax regime in its totality?  

The determination of the reference framework is key as it provides the base case scenario against which any comparative examination is carried out for the purposes of determining whether an economic advantage exists. Therefore an error made in determining the reference framework would impair the whole of the analysis carried out by the Commission and the GC.

The Advocate General’s opinion concludes that it was incorrect for the Commission and the GC to use the UK’s CFC regime as the reference framework, in isolation of the UK’s corporation tax system.  The UK’s CFC rules and the UK’s corporation tax system must be read together as they create a consistent body of rules that are not severable from each other.

This opinion was based on a number of factors, including the parallel purpose of the UK’s CFC rules and the UK’s corporation tax system.  The intention of such systems was to tax corporate profits that form part of, or that would have formed part of, the UK’s corporate tax base but for the anti-tax avoidance rules regarding base erosion and profit shifting.

The Advocate General also considered that the UK’s CFC rules complemented the UK’s corporation tax system’s territorial scope and noted other matching features between the UK’s CFC rules and the UK’s corporation tax system such as the taxable person being the UK resident company, the rate of tax imposed and the taxable event being the realisation of profits.

It will be interesting to see whether the CJEU agrees with the Advocate General’s opinion which, although it would not affect current law, would be a positive outcome for the affected companies.