On October 26, 2017 the European Commission announced that it had opened an in-depth investigation into the UK Group Financing Exemption. On November 16, 2017 the non-confidential version of this decision was made available in the State Aid Register on the European Commission's competition website.

The European Commission has doubts whether the Group Financing Exemption complies with EU State aid rules. In particular, the Commission seem to doubt whether the exemption is consistent with the overall objective of the UK CFC rules.


The UK's Group Financing Exemption was introduced with the reform of the UK CFC regime under the Finance Act 2012. In order to benefit from the tax exemption, companies do not need a tax ruling. The scheme entered into force on January 1, 2013.


The general purpose of the UK's Controlled Foreign Company (CFC) rules is to prevent UK companies from using a subsidiary, based in a low or no tax jurisdiction, to avoid taxation in the UK. In particular, the CFC rules allow the UK tax authorities to reallocate all profits artificially shifted to an offshore subsidiary back to the UK parent company, where it can be taxed accordingly. CFC rules in general are an effective and important feature of many tax systems to address tax avoidance.


However, since 2013 the UK's CFC rules include the Group Financing Exemption (an exception for certain financing income (i.e. interest payments received from loans) of multinational groups active in the UK). Generally speaking, financing income is often used as a channel for profit shifting by multinationals, given the mobility of capital. The UK's Group Financing Exemption exempts from reallocation to the UK, and hence UK taxation, financing income received by the offshore subsidiary from another foreign group company. Thus, a multinational active in the UK can provide financing to a foreign group company via an offshore subsidiary. Due to the exemption, it pays little or even no tax on the profits from these transactions, because:

·   the offshore subsidiary pays little or no tax on the financing income in the country where it is based; and

·   the offshore subsidiary's financing income is also not (or only partially) reallocated to the UK for taxation due to the exemption.

On the other hand, the CFC rules reallocate other income artificially shifted to offshore subsidiaries of UK parent companies to the UK for taxation


Click here to be forwarded to the non-confidential version of the letter via which the European Commission informs the UK authorities of its decision to start an in-depth investigation into the UK Group Financing Exemption as made available under the case number SA.44896 in the State Aid Register on the Commission's competition website.



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