The full decision in the EU State aid investigation into the UK CFC rules for non-trading finance profits (“NTFP”) has now been published.
In summary, whilst the Commission accepted that NTFP might raise a higher risk of artificial diversion of profit, it did not accept that this permitted the UK to differentiate loans made to non-UK affiliates from loans made to UK affiliates and to third parties. The Commission could not see how any Cadbury Schweppes argument could justify the special treatment for loans to non-UK affiliates and it also did not see that there could be an other infringement of the fundamental freedoms or any legitimate expectation arguments.
The important point was that the CFC regime brought NTFP within the CFC charge if either a significant people function (“SPF”) test or a UK connected capital test was satisfied. Crucially, however, the SPF test for NTFP was lighter than that for other profits. The Commission accepted that the 25% exemption within the NTFP regime might be an appropriate mechanical short-cut for the purposes of the UK connected capital test, but this did not justify the lighter SPF test for NTPF.
The Commission therefore concluded that the CFC regime for NTFP constituted State aid to the extent that the SPF relevant to the NTFP was located in the UK. It is for this reason that the changes made by the UK to the CFC rules with effect from 1 January 2019, so that the full SPF test applies to NTFP, means that the regime is now compliant with the State aid rules.
Whilst it is not yet clear whether the UK will appeal the decision, in the meantime affected groups should begin gathering evidence to support their SPF position.