Yesterday saw publication of the full final decision in the Commission's state aid investigation into the UK’s controlled foreign company (CFC) rules – in particular the finance company exemption / partial exemption within the CFC regime. (The decision is now available on the Commission’s website. Formal publication in the Official Journal is still to follow – which means that the clock is not yet ticking on taxpayers’ decision whether or not to appeal it.)
The Commission’s substantive reasoning is largely as we would have expected based on the 2 April press release (see my previous blog here). The narrower scope of the Commission’s adverse finding makes it easier to support, and (as expected) the Commission seeks to rebut some objections that have been raised (both by the UK government and others) following the opening decision. Nevertheless taxpayers (and the UK government) will still readily identify technical arguments with which to try to challenge the decision.
More surprising perhaps is what the Commission says about recovery, which is rather tougher than might have been expected based on the press release. As well as imposing the typical ‘full implementation within four months’ requirement (which the press release did not mention), the decision gives the UK just two months (from 2 April) to determine the amount of the aid in each affected taxpayer’s case, and to order repayment of that amount. Given the need for a case-by-case analysis of where the relevant SPFs were, that seems unrealistic. (And at some level, the Commission no doubt appreciates that.)
Furthermore, it seems that the Commission expects most potentially affected taxpayers to face some level of recovery: it quotes extensively HMRC’s toughly-worded guidance on the likelihood of SPFs being in the UK. In addition, the UK is required specifically to identify, and justify, any case where a taxpayer has claimed the benefit of the exemption and the facts are accepted as involving no UK SPFs, such that there is no recovery required.
Since the decision is arguably still flawed as a technical matter, and given the possibility of substantial recovery obligations otherwise falling due, it seems likely that potentially affected taxpayers will need to litigate the decision in Europe (whether or not the UK government does), and to prepare for difficult discussions with HMRC over the location of their SPFs.
The Commission's final decision is available here.
The main surprise is the tough line that the Commission looks to be taking on how much tax will still need to be recovered despite the narrower scope of its final decision against the UK. It has also imposed a very tight turnaround time (by 2 June) for the UK government to finalise the amounts and demand repayment, which is surely unrealistic. It seems likely that potentially impacted taxpayers will need to appeal the Commission’s decision in Europe, at the same time as disputing the calculation of recovery amounts with HMRC.