EU law not contravened

The claimants were UK resident subsidiaries of multinational groups of companies that had invested in the subsidiaries via loan finance. The proceedings were part of a group litigation concerning the compatibility of the thin capitalisation rules within article 43 of the EC Treaty (freedom of establishment).

In essence the thin cap legislation addressed what HMRC believed to be transfers of profits from the UK to another jurisdiction.

The issue before the Court of Appeal was whether the failure of the UK legislation to permit a commercial justification of transactions that were not arm’s length infringed the claimants’ rights under article 43.

HMRC argued that the legislation was permissible if it affected transactions between related companies that were not at arm’s length. The claimants argued that the rules were illegal if they affected genuine commercial transactions.

The Court of Appeal...