In brief
On 2 April 2019 the European Commission (EC) issued a press release that they have concluded that UK Finance Company Partial Exemption Rules (the FCPE rules) constitute partial state aid for the period from 2013 to 2018.
Taxpayers who benefitted from the FCPE rules will need to assess their options. This includes making an annulment application which will need to be filed within 2 months and 24 days of the publication in the Official Journal (which is expected in the next few weeks). The EC confirmed the change to the FCPE rules effective from 1 January 2019 means the rules are now state aid compliant which means taxpayers can retain their financing structure but will need to assess the profit allocable to UK significant people functions (SPFs) for the historic periods.
In a bit more detail
The FCPE rules provided for a partial (75%) or full exemption from UK imputation of financing income received by an offshore subsidiary from another foreign group company. The exemption applied regardless of whether the offshore finco was equity funded from the UK or if the income of the finco was derived from “UK activities”.
The Commission found that when financing income from a foreign group company which:
- is received through an offshore subsidiary
- is financed with UK connected capital and
- there are no UK activities involved in generating the finance profits,
the FCPE rules were justified and do not constitute State aid.
The Commission found that when financing income from a foreign group company which:
- is received through an offshore subsidiary and
- which derives from UK activities (or significant people functions)
the FCPE rules are not justified and do constitute State Aid.
Implications
Consequently, the Commission has found that under the UK activities test, the exemption unduly exempted profits from UK rules targeting tax avoidance. The UK must now seek to recover the tax from the multinational companies that benefited from it.
As a result, taxpayers that had previously relied on the Chapter 9 exemption and had UK activities need to determine whether and to what extent any exemption they claimed constitutes state aid, i.e. were the CFC profits attributable to UK activities greater than the amount brought into account post the exemption. This will impact the exemptions claimed during the period 2013-2018 (changes to the UK CFC rules from 1 Jan 2019 prevented the use of Chapter 9 for UK activities).
Potential options include making an annulment application which will need to be filed within 2 months (and 24 days) from the date of publication of the full decision in the Official Journal. Given that it appears likely to be the case that the post 1 January 2019 CFC rules are compliant with EU State Aid rules, taxpayers can retain their financing structure but will need to assess the profit allocable to UK significant people functions for the historic periods.
The EC press release can be found here.
