There has been significant publicity in recent years around the contravention of EU state aid rules by high profile multinational groups resident in Luxembourg, Ireland and the Netherlands (e.g. Fiat, Starbucks and Apple) all of whom were deemed to have been granted tax advantages through selective State Aid. To put the cash impact of these rulings in context, Apple has been told to repay in the region of $13bn to the Irish Government. However, the UK is now set to join the contravention party before it leaves the EU, with many high-profile UK companies facing state aid allegations, which could cost these companies in excess of £1bn and is being dubbed ‘The Brexit Bombshell’.
Back in October 2017, the European Commission (EC) opened an investigation into the UK’s CFC rules led by Margrethe Vestager, looking at whether the UK was guilty of contravening EU state aid rules. In short, a group financing exemption was introduced into UK CFC rules in 2013, as part of a general revision and relaxation of the CFC rules under George Osborne. The introduction of this new caveat broadly allowed the profits generated from intra-group financing to be partially or fully exempt from a UK CFC charge, as a UK entity could loan monies to a foreign subsidiary via an offshore subsidiary which is not picked up under the CFC rules. As a result, the UK is being accused of allowing an exemption from generally applicable anti-avoidance legislation which provides an unfair advantage for companies based in the UK. If the European Commission is successful in its challenge, the UK government will be asked to recover the tax and interest from these companies.
The timing of this investigation is interesting on two counts:
- the European Commission will no longer be able to impose EU state aid challenges once the UK leaves the EU; and
- the timing of the opening of this investigation vis-a-vis the introduction of this legislation is a gap of about four years. The investigation was opened in October 2017 and the typical length of the time it takes the EC to rule on such investigations is about 18 months, so the ruling is expected in March 2019 - around the same time as the UK will depart the EU.
One positive that should be capitalised upon, is the fact that once the UK leaves the EU, it is no longer under the rule of the EC. The UK can use this to its advantage to promote itself as a favourable holding company jurisdiction to encourage inward investment, as compared to other popular holding company jurisdictions (e.g. the Netherlands) which have been subject to EU state aid investigations and are arguably open for more!