Court of Justice overturns General Court and finds in favour of HMRC in long-running tax case

19/09/24

The Court of Justice of the European Union handed down its judgment today in the long-running dispute between the UK Government and the European Commission concerning whether or not the UK’s tax regime, as regards the profits of controlled foreign companies (“CFCs”), gave rise to unlawful State aid.

In 2019 the Commission found that the UK tax rules relating to CFCs – set out in Part 9A of the Taxation (International and Other Provisions) Act 2010 (“TIOPA”) – granted State aid to some UK companies. In essence, the Commission’s view was that the exemption of certain types of profits from tax (non-trading financial profits arising from qualifying loans) constituted aid to UK-domiciled parent companies.

The United Kingdom Government applied to annul the Commission’s Decision on various grounds. In particular, the Commission had misunderstood UK law and identified the wrong reference framework. The Commission found that the exemptions were a derogation from the CFC Rules; the UK Government argued that the proper reference framework was the general corporation tax system of the UK. For that reason, the UK Government argued that there was no derogation (or advantage) at all.

In June 2022 the General Court rejected the application for annulment, finding for the Commission on all grounds. The UK Government appealed to the Court of Justice.

In today’s judgment the CJEU held that:

1. The proper identification of the reference framework is a question of law, not a question of fact reserved for the General Court [60].
2. Where the Commission disagrees with the Member State (or in this case former Member State), the Commission is “in principle required to accept the interpretation of the relevant provisions of national law given by the Member State concerned… provided that that interpretation is compatible with the wording of those provisions.” [97]
3. Having considered the domestic legislation in detail, the Court concluded that the interpretation advanced by the UK was consistent with the language of TIOPA. For that reason, there was no basis for the Commission (or the General Court) to have concluded that the UK Government was wrong as to the appropriate reference system [135].

Consequences

The Judgment is an important step in affirming that the CJEU is prepared – where appropriate – to defer to the views of Member States in non-harmonised areas of tax. It should be read alongside, and contrasted with, the recent Apple Judgment, in which the Court disagreed with the Irish Government and required Apple to pay 13 billion Euros in unpaid tax

Subject to any further decision by the Commission, the domestic procedure, by which the UK Government sought to recover the unlawful aid, will now come to an end and the Treasury will bring in regulations to provide that the companies affected will be put back in the position they would have been absent recovery.

The Judgment can be found here.