UK Companies to Receive £700 Million Windfall After European Court of Justice Reverses Tax Ruling

Repayment obligation on the UK government at a time of raising taxes and working to address a budget shortfall

| Image Credits: Paternoster Square as seen from St. Paul's Cathedral - London Stock Exchange

In a September 19, 2024 Judgment of the Court in Joined Cases C-555/22 P | United Kingdom and Others v Commission, C-556/22P | ITV v Commission and Others and C-564/22 P | LSEGH (Luxembourg) and London Stock Exchange Group Holdings (Italy) v Commission and Others (Taxation of profits of CFCs), the European Court of Justice (ECJ) overturned a 2019 European Commission decision that had categorized certain UK tax exemptions as illegal state aid. The reversal mandates the UK government to refund nearly £700 million to major British companies.

BACKGROUND OF THE CASE

The dispute dates back to 2016, when the European Commission accused the UK of providing selective tax advantages to certain corporations through exemptions from the “Controlled Foreign Company” (CFC) charge. This tax applied to UK-based companies profiting from controlled foreign subsidiaries and aimed to prevent profit-shifting to low-tax jurisdictions. The Commission’s 2019 decision deemed the exemptions from this tax as illegal state aid, forcing the UK to collect taxes it had previously waived.

KEY BENEFICIARIES OF THE ECJ DECISION

Following the ECJ’s recent ruling, HM Revenue & Customs (HMRC) will reimburse large companies that were previously affected by the tax decision. The Office for Budget Responsibility (OBR) estimates this will cost the UK government £700 million in the current tax year. Among the primary beneficiaries, media and education company Pearson expects a refund of approximately £105 million. The London Stock Exchange Group (LSEG) also stands to gain after having paid £11 million to HMRC, with a potential exposure of £65 million. ITV, the British broadcaster, is expected to receive around £10 million.

THE EUROPEAN COMMISSION'S ARGUMENT AND THE UK’S RESPONSE

The European Commission argued that exemptions from the CFC charge were selective advantages inconsistent with EU internal market rules. It maintained that these exemptions allowed multinational corporations to reduce their tax obligations in a way that was inaccessible to domestic firms, thereby constituting illegal state aid. The UK government, however, contended that the CFC tax exemption was part of its general corporate tax framework, aimed at fostering a favorable environment for multinationals.

The UK government and ITV initially contested the 2019 ruling at the EU’s General Court, which upheld the Commission’s decision. However, they appealed to the ECJ, which ultimately rejected the Commission's analysis, agreeing with the UK’s stance that the tax exemption did not selectively benefit certain corporations in a way that violated EU law.

THE ECJ'S REASONING

The ECJ’s decision hinges on the interpretation of the "reference framework" for assessing selectivity. The Court determined that the European Commission erred in treating the CFC rules as an independent framework separate from the UK’s general corporate tax system. According to the Court, the Commission’s interpretation lacked sufficient evidence and failed to account for the territorial principles underlying the UK’s corporate tax structure. Consequently, the ECJ held that the analysis of selectivity was flawed, necessitating the annulment of the General Court's judgment and the original Commission decision.

IMPLICATIONS FOR UK POLICY AND EUROPEAN TAX LAW

This ruling may embolden other EU and non-EU countries to challenge state aid rulings, highlighting the growing tensions between national tax policies and EU oversight. It also underscores the complexity of enforcing tax uniformity across jurisdictions with diverse corporate tax systems.

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