Op-Ed: “Instances C‑555/22 P, C‑556/22 P and C‑564/22 P UK and ITV v Fee: similar to Apple, besides utterly completely different?” – Cyber Tech

That is the fifth Op-Ed of a Symposium on the Apple State Assist case (C‑465/20 P).  Earlier Op-Eds have been authored by Romero J. S. Tavares , Scott Wilkie, Svitlana Buriak and Juan Jorge Piernas López.

 Introduction

That’s all people! The UK Managed Overseas Firm (‘CFC’) judgment (C‑555/22 P, C‑556/22 P and C‑564/22 P), handed down by the Court docket of Justice on 19 September 2024, was the ultimate it will hand down in regards to the UK. This Op-ed examines the case and highlights the distinction between the reasoning on this judgment and that of the Court docket of Justice, the earlier week, in Apple ( C-465/20 P).

Common Background

When triggered, the CFC guidelines attribute (all or some portion of) the abroad income of a Subsidiary (the ‘CFC’) to a controlling Guardian within the Guardian’s dwelling jurisdiction, for our functions the UK. CFC guidelines, in precept, run counter to the territoriality precept, which broadly constrains a rustic’s taxing energy to the actions that happen inside its borders. In consequence, they are typically narrowly focused at actions the place the danger of income being artificially shifted is excessive. Within the absence of CFC guidelines, there are two very straightforward methods through which a Guardian might shift income to a low tax jurisdiction. The Guardian might present funds to a low taxed Subsidiary which it will then lend again to the Guardian (generally known as an ‘upstream mortgage’). The curiosity payable to the CFC could be deducted from the Guardian’s taxable income. Or, moderately than the Guardian depositing these funds in a financial institution itself and paying tax on any curiosity accrued, the Guardian might present them to the Subsidiary which in flip would deposit them in a financial institution and generate curiosity (generally known as a ‘moneybox mortgage’).

The UK has had CFC guidelines since 1984 following an obvious improve in using tax haven firms after the elimination of change controls in 1979. There have been a number of adjustments to the foundations since. Most notably, the foundations had been amended in response to the Cadbury Schweppes (C-196/04) case, the place it was discovered that the UK regime was not appropriate with EU regulation insofar because it focused extra than simply ‘wholly synthetic preparations’.

The related UK CFC guidelines

The principles had been modified in 2012, with impact from January 2013 and amended once more from January 2019. It was the 2012 iteration of the foundations that the Fee took subject with, specifically the foundations round non-trading finance income (‘NTFP’). Placing it at its easiest, NTFP are income which come up from the availability of loans, therefore ‘finance income’, however the entity which gives the loans just isn’t functionally equal to a financial institution and as an alternative would possibly act extra like an investor, therefore ‘non-trading’. Particularly, the Fee argued that the foundations imposing a CFC cost on the NTFP of a CFC (present in Chapter 5 of 2010–Taxation [International and Other Provisions] Act, ‘TIOPA’) breached Article 107(1) in as far as there was an exemption (partial or full, and to be present in Chapter 9 of TIOPA 2010) to the cost in instances the place these income come up from a qualifying mortgage (‘QL’) relationship, specifically the place loans are made to different non-UK subsidiaries.

The Chapter 5 cost utilized in 2 eventualities: the place the income had been attributable to (1) important individuals capabilities (‘SPFs’) carried out within the UK or (2) UK funds. As for situation (1), analysing whether or not SPFs are current, and if that’s the case the place, is a type of switch pricing evaluation, which is difficult and time-consuming. As for situation (2) in the meantime, tracing whether or not fungible capital inside a multinational group comes from the UK can be a cumbersome train. As such, Chapter 5 triggers severe administrative inconvenience each for the tax authority and the taxpayer involved. That administrative inconvenience is spared by the Chapter 9 exemption.

In keeping with the UK (and different events within the litigation), Chapter 9 offered the exemption as a result of there was a low threat of income being artificially diverted the place the CFC gives QLs. The exemption didn’t apply, conversely, to situations the place the danger of abuse was excessive, equivalent to within the case of upstream or moneybox loans. Limiting the scope of the CFC guidelines to these high-risk circumstances additionally accorded with the Cadbury Schweppes judgment insofar as they solely focused wholly synthetic preparations.

The Fee resolution

In issues of tax, it’s the ‘selective benefit’ criterion which is basically determinative as as to whether Article 107(1) TFEU is breached (AG Kokott opinion in Case C-66/14, para 114). The Fee’s selective benefit evaluation, with which the Common Court docket agreed (Instances T-363/19 and T-456/19), was as follows:

• the reference framework was the UK CFC guidelines;
• there was a bonus insofar as NTFP had been exempted for CFCs with QL relationships;
• this benefit was a priori selective because it utilized to UK parented teams with a CFC making QLs, however not in comparable circumstances as with upstream or moneybox loans;
• as for justification, the Fee agreed that in situations the place the NTFP of the CFC come up from UK funded loans however the place the CFC has no UK SPF, it will be excessively cumbersome to require a tracing train (situation (2) above). However this may not be the case the place the NTFP of the CFC come up from UK SPFs (situation (1). Such SPF evaluation would even have ensured that solely wholly synthetic preparations (à la Cadbury Schweppes) had been combatted.

The UK was ordered accordingly, in April 2019, to gather unpaid again taxes, which can have been over £1billion (although the creator understands {that a} far decrease determine was in reality due).

The Court docket of Justice

The UK (and events) appealed to the Court docket of Justice, with the willpower of the reference framework being key to the attraction. In step with the Advocate Common’s opinion, the Court docket of Justice agreed with the UK’s evaluation that the reference framework should have been the Common Company Tax System (‘GCTS’) and the failure to use the right reference framework vitiated all the evaluation. The GCTS is essentially territorial and the CFC guidelines offered an exception to the precept of territoriality solely the place there was a excessive threat of income being artificially diverted from the UK; income which might, however for the factitious diversion, ordinarily be taxable within the UK. As such, the logic of the CFC and GCTS guidelines was the identical they usually had been inseparable (paras. 107-108). The danger-based method to the laws mandated that Chapter 9 shouldn’t be seen as an exemption to Chapter 5. As an alternative, the 2 needs to be learn collectively as defining the scope of the cost (para. 112). In different phrases, the danger of synthetic diversion of income was excessive not the place Chapter 5 applies per se, however as an alternative solely the place Chapter 9 doesn’t apply and Chapter 5 situations are current.

In arriving at this conclusion, the Court docket of Justice faithfully utilized the method handed down by the Court docket final yr in Engie (C‑451/21 P and C‑454/21 P). In figuring out the reference framework, the Fee ought to defer to the Member State’s interpretation of its guidelines, offered that it’s appropriate with the wording of the laws and the Fee can’t level to constant and dependable proof on the contrary from case regulation or administrative observe. On condition that the Fee couldn’t level to such opposite proof, the Court docket’s evaluation hinged on the compatibility of the UK interpretation with the legislative wording, which the Court docket discovered to not be incompatible (see paras. 113-127).

Reconciling Apple?

The judgment, handed down simply over every week after the Court docket’s controversial findings within the €13billion Apple case (C-465/20 P), jars in its use of the deferential Engie method. Whereas in UK CFC , the Court docket of Justice utilized Engie to the tee, in Apple, the Court docket of Justice very a lot didn’t. In Apple. there was a dispute about the way to interpret Irish regulation, particularly Taxes Consolidation Act (TCA) 1997, s. 25, which taxes non-resident firms on their Irish buying and selling income. Was the Irish interpretation appropriate with the wording of the laws? Nicely, on condition that the laws on the time was fairly imprecise, it is rather troublesome to say the interpretation was incompatible. In that case, the Fee ought to have accepted the Irish interpretation except it had proof on the contrary. However the case regulation is greatest learn as aligning with the Irish interpretation (see my dialogue of Murphy v Dataproducts [1988] IR 10 in Intertax) and the Fee itself had accepted that Eire didn’t have a constant administrative observe as regards the way to method TCA 1997, s. 25 (recital 403). That the Court docket of Justice might so transform its method to the State assist guidelines from one week to the following is, frankly, scandalous.

The one manner of reconciling the judgments is by hiding behind the precept of res judicata (paras. 144 and 303), by the use of which unchallenged findings from the Common Court docket can’t be reopened on the Court docket of Justice. However that’s fully unsatisfactory for myriad causes, solely two of which I increase right here. First, the Engie case postdates the attraction within the Apple case, so the impact of res judicata is to bar Eire from pursuing an argument that it by no means had the chance to make.

Secondly, in Koen Lenaerts’ personal phrases (at p. 29), the precept of res judicata just isn’t ‘absolute’. The Court docket just isn’t barred per se from re-examining points even the place there isn’t a cross attraction. If the Court docket needs to discover a manner of re-examining a difficulty, it will probably actually discover a manner (as steered additionally by Juan Jorge Piernas López). Certainly, it did simply that within the context of a difficulty within the case which was not topic to attraction: the Court docket (see paras. 273-275 specifically) fortunately reopened the difficulty of the conflation of the benefit and selectivity standards by the Common Court docket, regardless of this not being topic to cross attraction. Certainly, the chance that the Court docket can reopen factors is strengthened by its sturdy pronouncements within the Engie (para. 78), FIAT (para. 85), and UK CFC (para. 60) instances that an error in defining the right reference framework is an error of EU regulation that the Court docket of Justice can’t be barred from revisiting. However in Apple, the Court docket of Justice ought to bar itself from revisiting such a difficulty figuring out that, within the course of, it’s making an error of EU Regulation?

There’s a additional pressure between the Apple and UK CFC judgments in respect of the therapy of territoriality. Eire had argued its interpretation of TCA 1997, s. 25 mirrored the territoriality precept (recital 195), however the Court docket didn’t settle for the relevance of the precept to understanding Irish regulation (para. 309). Within the UK CFC judgment alternatively, the Court docket was clearly very receptive to utilizing the territoriality precept to grasp UK regulation.

Conclusion

In the end, the UK CFC judgment is one other in a rising listing of State assist judgments (Amazon, Engie, FIAT and the turnover tax instances ( C 562/19 P and C 596/19 P)) the place the Court docket of Justice has strongly upheld Member State sovereignty and pushed again towards the Fee’s makes an attempt to increase the scope of the State assist guidelines. On the subject of basic tax guidelines or the interpretation of home tax guidelines, the Court docket will respect Member State selections. Simply not on a regular basis, because the Apple resolution tells us.