EU investigates UK controlled foreign company rules

The European Commission is scrutinising the UK’s controlled foreign company (CFC) rules to check whether exemptions allow multinationals to pay less UK tax in breach of EU state aid rules.

The regime prevents UK companies using a subsidiary based in a low or no tax jurisdiction to avoid UK tax. It allows HMRC to reallocate all profits artificially shifted to an offshore subsidiary back to the UK parent company.

However since 2013 the rules have included an exception (the group financing exemption) for some multinational groups. As a result a multinational in the UK can provide financing to a foreign group company through an offshore subsidiary but due to the exemption it pays little or no tax on the profits from these transactions because:

• the offshore subsidiary pays little or no tax on the financing income in the country where it is...