EU opens state aid probe into UK tax scheme for multinationals

By Julia Fioretti

BRUSSELS (Reuters) - The European Commission is investigating whether a British tax exemption for multinational companies amounts to illegal state aid, the EU's Competition Commissioner said.

At stake is a 2013 overhaul of Britain's anti-corporate tax avoidance regime, conducted by the then-Conservative-led government to attract companies to set up headquarters in Britain and to discourage UK companies moving off-shore.

As part of that change, Britain introduced an exemption to its Controlled Foreign Company (CFC) rules.

CFC rules are usually intended to stop companies shifting untaxed profits into tax havens but London introduced an exemption for interest income earned by offshore subsidiaries which tax campaigners said was a major loophole.

"Rules targeting tax avoidance cannot go against their purpose and treat some companies better than others," EU Competition Commissioner Margrethe Vestager said.

"This is why we will carefully look at an exemption to the UK's anti-tax avoidance rules for certain transactions by multinationals, to make sure it does not breach EU state aid rules," she said in a statement.

A spokeswoman for UK Prime Minister Theresa May said Britain does not believe its tax laws are incompatible with EU rules, but would cooperate with the Commission.

Vestager has crusaded against what she calls unfair tax benefits granted to some firms in EU countries, notably ordering Ireland to recover up to 13 billion euros from Apple.

The UK measure was successful in encouraging a number of big companies to move their headquarters or tax residence to Britain.

A 2014 Reuters investigation showed that while the changes had helped companies cut tax bills, the relocations brought few jobs to Britain. (http://www.reuters.com/article/2014/06/09/us-britain-usa-tax-insight-idUSKBN0EK0BF20140609)

CFC rules work by re-allocating profits shifted by a parent company to a subsidiary in a tax haven, back to the parent. Germany and France have strong CFC rules, accountants say, but the UK's current regime is seen as one of the weaker ones in Europe.

The Commission said it had doubts whether the exemption on finance income earned by offshore subsidiaries complies with EU state aid rules forbidding preferential treatment of some companies over others.

A Commission spokesman said it was too early to say how much Britain might be asked to recover from the companies benefiting from the exemption, and would not be drawn on the possible impact of Brexit on the investigation.

The state aid investigation could extend beyond Britain's exit from the EU in March 2019, but the Commission spokesman Alexander Winterstein said that as long as the UK remained part of the EU it had to abide by the rules.

"As long as a member state is a member of the single market, it is subject to EU competition rules including those on state aid, and everything else will be part of the negotiations which are ongoing so I will not enter into speculation on this," he said at a daily briefing.

(Additional reporting by Tom Bergin in London; editing by Mark Heinrich and Jane Merriman)