The European Commission determined the tax breaks gave foreign companies an unfair advantage.
The European Union’s high court ruled on Sept. 19 that a British scheme that allegedly granted tax breaks to certain multinational companies between 2013 and 2018 did not breach European Union state aid law.
The
ruling by the Luxembourg-based Court of Justice of the European Union (CJEU) stemmed from the tax scheme promoted under the UK’s Controlled Foreign Company (CFC)
rules, which are set out in the Taxation (International and Other Provisions) Act of 2010.
Those rules were aimed at preventing UK companies from using a subsidiary, based in a low or no-tax jurisdiction, to avoid taxation in the UK,
according to the European Commission, the primary executive arm of the EU responsible for ensuring that EU policies and laws are correctly applied.
They also allowed the UK tax authorities to reallocate all profits artificially diverted to an offshore subsidiary back to the UK parent company, where it can be taxed accordingly.
Additionally, under the rules, tax exemptions were granted to multinational corporations based in the UK on some of the profits from their CFCs.
In April 2019—nearly a year before Britain officially withdrew from the 27-country bloc, the Commission
determined the tax breaks gave foreign companies an unfair advantage by granting them an “unjustified” exemption from UK anti-tax avoidance rules.
This, the Commission said, was illegal under EU state aid
rules aimed at preventing companies from gaining competitive advantages.
Following its determination, the Commission said the UK must recover what it called the “illegal State aid” from the multinational companies that benefitted from it between 2013 and 2018.
Lower Court ‘Erred in Law’
While the Commission did not name the companies that benefited from the scheme, multiple companies including BBA Aviation, Chemring, Daily Mail & General, Diageo, Euromoney, Inchcape, Meggitt, Smith & Nephew, and WPP have mentioned the EU investigation in their accounts.A lower court
upheld the Commission’s decision in 2022 following a challenge by the British government and multiple FTSE 100 companies, including broadcaster ITV, as well as the London Stock Exchange.
They
argued in part that the Commission had misunderstood UK law and failed to identify the correct reference framework— that is, the general corporation tax system of the UK.
In its ruling, the CJEU sided with the UK, finding the scheme did not illegally benefit multinational corporations based in the country.
The lower court “erred in law” when it confirmed that, as the Commission had found in its decision, “the reference framework for the purposes of examining the selectivity of the exemptions at issue ... consisted solely of the rules applicable to CFCs, set out in Part 9A of the TIOPA,” the high court said in its ruling.
The Commission may only depart from the Member State’s interpretation of the relevant provisions of its national law if it is able to establish, on the basis of reliable and consistent evidence, that “another interpretation prevails in the case-law or the administrative practice of that Member State,” the court wrote.
The ruling is final and cannot be appealed.
It comes just days after the CJEU ruled that tech giant Apple must pay more than
$14 billion in back taxes to Ireland after the EU Commission said in 2016 that the tax breaks offered by Ireland were illegal.
Reuters contributed to this report.
