# C_2019263EN.01006201.xml

| 5.8.2019 | EN | Official Journal of the European Union | C 263/62 |
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5.8.2019

EN

Official Journal of the European Union

C 263/62

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Action brought on 12 June 2019 — United Kingdom v Commission

(Case T-363/19)

(2019/C 263/68)

Language of the case: English

Parties

Applicant: United Kingdom of Great Britain and Northern Ireland (represented by: S. Brandon, Agent, P. Baker QC and T. Johnston, Barrister)

Defendant: European Commission

Form of order sought

The applicant claims that the Court should:

| — | annul European Commission Decision C(2019) 2526 of 2 April 2019 on the State aid SA.44896 implemented by the United Kingdom concerning CFC Group Financing Exemption; |
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annul European Commission Decision C(2019) 2526 of 2 April 2019 on the State aid SA.44896 implemented by the United Kingdom concerning CFC Group Financing Exemption;

| — | order the Commission to pay the costs. |
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order the Commission to pay the costs.

Pleas in law and main arguments

In support of the action, the applicant relies on four pleas in law.

| 1. | First plea in law, alleging manifest error of assessment: identification of the wrong reference system.






  — | The applicant argues that the Commission erred when it held that the Controlled Foreign Company (CFC) rules provide the proper framework for an examination of comparability (Recital 107 in the preamble to the contested decision). |
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1.

First plea in law, alleging manifest error of assessment: identification of the wrong reference system.

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The applicant argues that the Commission erred when it held that the Controlled Foreign Company (CFC) rules provide the proper framework for an examination of comparability (Recital 107 in the preamble to the contested decision).

| — | The UK operates a largely territorial corporation tax (CT) system: in general, only profits derived from the UK are taxable. The relevant starting point, therefore, is that no tax is payable in respect of the profits of any overseas subsidiaries. The CFC legislation deviates from this position and establishes a number of exceptional circumstances in which a CFC charge may be payable. The proper reference system, therefore, is the framework of CT as a whole. The applicant argues that the Commission erred when it selected an artificially narrow reference framework |
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The UK operates a largely territorial corporation tax (CT) system: in general, only profits derived from the UK are taxable. The relevant starting point, therefore, is that no tax is payable in respect of the profits of any overseas subsidiaries. The CFC legislation deviates from this position and establishes a number of exceptional circumstances in which a CFC charge may be payable. The proper reference system, therefore, is the framework of CT as a whole. The applicant argues that the Commission erred when it selected an artificially narrow reference framework

| 2. | Second plea in law, alleging that the exemptions contained in Chapter 9 of the Taxation (International and Other Provisions) Act 2010 are not derogations.






  — | The objective of the CFC rules is to impose a CFC charge in respect only of those arrangements that pose a high risk of abuse/artificial diversion. The UK selected a legislative technique whereby it: (i) began with a broad and inclusive definition of CFCs, and (ii) excluded the overwhelming majority of profits derived from CFCs, in order to identify only the narrow category of profits that present a risk of abuse/artificial diversion. Chapters 5 and 9 of the Taxation (International and Other Provisions) Act 2010 operate together to identify those arrangements that present a high risk of abuse/artificial diversion. |
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2.

Second plea in law, alleging that the exemptions contained in Chapter 9 of the Taxation (International and Other Provisions) Act 2010 are not derogations.

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The objective of the CFC rules is to impose a CFC charge in respect only of those arrangements that pose a high risk of abuse/artificial diversion. The UK selected a legislative technique whereby it: (i) began with a broad and inclusive definition of CFCs, and (ii) excluded the overwhelming majority of profits derived from CFCs, in order to identify only the narrow category of profits that present a risk of abuse/artificial diversion. Chapters 5 and 9 of the Taxation (International and Other Provisions) Act 2010 operate together to identify those arrangements that present a high risk of abuse/artificial diversion.

| — | It is further argued that the Commission manifestly erred when it held that the said Chapter 9 Exemptions are a derogation, because it focused on the legislative technique employed, not the underlying objectives of the measure. |
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It is further argued that the Commission manifestly erred when it held that the said Chapter 9 Exemptions are a derogation, because it focused on the legislative technique employed, not the underlying objectives of the measure.

| — | In the applicant’s view, the Commission also held — wrongly — that there was no relevant distinction between Qualifying Loan Relationships (QLRs) and non-QLRs. The UK Government is uniquely well placed to determine which kinds of arrangements present a high risk of abuse/artificial diversion. The Commission, it is alleged:






  a. | erred in law when it failed to grant the UK Government a suitable margin of appreciation when assessing that issue; and |
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In the applicant’s view, the Commission also held — wrongly — that there was no relevant distinction between Qualifying Loan Relationships (QLRs) and non-QLRs. The UK Government is uniquely well placed to determine which kinds of arrangements present a high risk of abuse/artificial diversion. The Commission, it is alleged:

a.

erred in law when it failed to grant the UK Government a suitable margin of appreciation when assessing that issue; and

| b. | manifestly erred in its assessment of the arrangements in question. |
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b.

manifestly erred in its assessment of the arrangements in question.

| 3. | Third plea in law, alleging a manifest error of assessment regarding selectivity.






  — | The Commission was wrong to find that the United Kingdom should have relied only on a ‘significant people functions’ (SPF) test, as opposed to the said Chapters 5 and 9 operating together. It was also wrong to reject the assessment that an SPF-based approach alone was equally complex to administer as an approach based on capital investment from the UK. |
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3.

Third plea in law, alleging a manifest error of assessment regarding selectivity.

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The Commission was wrong to find that the United Kingdom should have relied only on a ‘significant people functions’ (SPF) test, as opposed to the said Chapters 5 and 9 operating together. It was also wrong to reject the assessment that an SPF-based approach alone was equally complex to administer as an approach based on capital investment from the UK.

| — | The applicant further maintains that the Commission also erred when it rejected the position of the UK that the said Chapter 9 exemptions were an appropriate, proportionate and administratively workable response to the judgment of the Grand Chamber in Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd. v. Commissioners of Inland Revenue, (Case C-196/04, EU:C:2006:544). |
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The applicant further maintains that the Commission also erred when it rejected the position of the UK that the said Chapter 9 exemptions were an appropriate, proportionate and administratively workable response to the judgment of the Grand Chamber in Cadbury Schweppes plc and Cadbury Schweppes Overseas Ltd. v. Commissioners of Inland Revenue, (Case C-196/04, EU:C:2006:544).

| 4. | Fourth plea in law, alleging that there is no effect on intra-EU trade.






  — | The applicants argue, finally, that the Commission erred when it held that the said Chapter 9 Exemptions granted a ‘benefit’ to any company so as to affect intra-EU trade. Rather they provide, in the applicant’s view, a mechanism by which a CFC charge is imposed on UK-resident companies in a small number of cases. At the relevant time (2013) there was no Union-wide obligation to levy tax on the profits of CFCs, and the Commission has failed to demonstrate that the said Chapter 9 Exemptions provided any advantage, when compared to the obligations imposed in other Member States, so as to affect intra-EU trade. |
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4.

Fourth plea in law, alleging that there is no effect on intra-EU trade.

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The applicants argue, finally, that the Commission erred when it held that the said Chapter 9 Exemptions granted a ‘benefit’ to any company so as to affect intra-EU trade. Rather they provide, in the applicant’s view, a mechanism by which a CFC charge is imposed on UK-resident companies in a small number of cases. At the relevant time (2013) there was no Union-wide obligation to levy tax on the profits of CFCs, and the Commission has failed to demonstrate that the said Chapter 9 Exemptions provided any advantage, when compared to the obligations imposed in other Member States, so as to affect intra-EU trade.

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