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EU State Aid and the UK: A Final Flurry?

Following a press release on 19 December 2018, the EU very recently published its decision on the Gibraltar Corporate Income Tax regime.

The decision concludes that in the years 2011 to 2013 the Gibraltar system of exempting interest and royalties from taxation favoured multinational groups and was illegal State Aid. After a review of 165 rulings, it found that 5 were also illegal State Aid.

Because Gibraltar is a British Overseas Territory, the decision is directed at the UK even though Gibraltar has an independent tax system.

The decision only applies to a handful of rulings and looks at a limited aspect of the Gibraltar tax system. It may be therefore that the decision has gone under the radar of many tax directors!

However, tucked away in the 60+ page decision is Recital 248, which says in part:

“…without prejudice to any provisions of the withdrawl agreement, this Decision only applies until the United Kingdom ceases to be a Member State”

This is capable of a number of interpretations, but one is that in a no deal Brexit, no further action in relation to the decision can be made!

Why is this of interest?

It is generally expected that the Commission will soon (and before Brexit) issue its final decision in relation to the “finance company exemption” to the UK’s controlled foreign company regime.

The rumour mill suggests the decision will be adverse.

Unlike the Gibraltar Decision, this will impact many plcs as the exemption has been a popular way of sheltering finance income (e.g. interest on inter group loans) from UK tax.

The politics around the issuance of an adverse decision so close to Brexit will be interesting to watch as many household name plcs will be impacted.

Generally, when an adverse decision is issued, the Member State is directed to collect the tax that was the subject of the State Aid very quickly (although in historic practice it can take up to 12 months).

However, what will happen here – especially as the collection mechanisms have some interesting nuances?

I will now refer you back to the “Brexit clause” in the Gibraltar Decision. Will the expected finance company exemption decision have a similar clause – and what precisely does it mean and what effect will it have?

Tax directors may have some difficult decisions to make in the very near future!