Cases T‑363/19 and T‑456/19

United Kingdom of Great Britain and Northern Ireland
and
ITV plc

European Commission

Judgment of the General Court (Second Chamber, Extended Composition), 8 June 2022

(State aid – Aid scheme implemented by the United Kingdom in favour of certain multinational groups – Decision declaring the aid scheme incompatible with the internal market and unlawful and ordering the recovery of the aid paid – Advance tax rulings – Tax regime relating to the financing of groups and concerning in particular controlled foreign companies – Selective tax advantages)

State aid – Concept – Grant of an advantage to the beneficiaries – Measure conferring a tax advantage – Reference framework for determining the existence of an advantage – Material scope – Criteria – Identifying the ordinary or ‘normal’ tax regime – Tax regime providing for the taxation of profits artificially diverted to controlled foreign companies

(Art. 107(1) TFEU)

(see paragraphs 59, 60, 65-70, 73, 79, 91)
State aid – Concept – Selective nature of the measure – Measure conferring a tax advantage – Reference framework for determining the existence of an advantage – Measure differentiating between operators that are, in the light of the objective pursued by the ordinary tax system, in a comparable factual and legal situation – Tax exemption not applicable to transactions comparable to those governing its grant – Measure which may be regarded as selective

(Art. 107(1) TFEU)

(see paragraphs 61, 111, 112, 118-120, 132-143, 148-160, 167-181, 182)
State aid – Concept – Grant of an advantage to the beneficiaries – Measure conferring a tax advantage – Tax regime providing for the taxation of artificially diverted profits to controlled foreign companies – Tax measure derogating from that regime and providing for a tax exemption for certain non-trading finance profits of controlled foreign companies – Mitigation of charges normally included in the budget of an undertaking – Included

(Art. 107(1) TFEU)

(see paragraphs 97-108)
State aid – Concept – Selective nature of the measure – Derogation from the normal tax regime applicable – Justification derived from the nature and general scheme of the system – Burden of proof

(Art. 107(1) TFEU)

(see paragraphs 186, 187)
State aid – Effect on trade between Member States – Adverse effect on competition – Criteria for assessment – Scope of the burden of proof on the Commission

(Art. 107(1) TFEU)

(see paragraphs 205-209)
State aid – Concept – Selective nature of the measure – Criteria for assessment – Taking into account previous practice – Not included – Breach of the principle of equal treatment – None

(Art. 107(1) TFEU)

(see paragraphs 212-218)
State aid – Examination by the Commission – Examination of an aid scheme as a whole – Whether permissible – Obligation for the Commission to assess individually the situation of certain beneficiaries – None – Verification by the national authorities when implementing the decision

(Arts 107 and 108 TFEU)

(see paragraphs 225-229)

Résumé

Under the corporation tax rules in the United Kingdom, only profits generated by activities and assets in the United Kingdom are taxed. However, the rules applicable to controlled foreign companies (CFCs) provide that the profits of those CFCs are taxed in the United Kingdom by means of a charge (‘the CFC charge’) when they are considered to have been artificially diverted from the United Kingdom.

Such a CFC charge was provided for, inter alia, in respect of the non-trading profits of CFCs, when they arose from activities the significant human functions of which were carried out in the United Kingdom or had been generated from United Kingdom funds or assets.

The rules applicable to CFCs, as applicable between 1 January 2013 and 31 December 2018, provided for the exemption from the CFC charge of non-trading finance profits arising from intra-group loans granted by a CFC to other members of the group which are not resident in the United Kingdom (‘qualifying loans’) and for which those groups could submit an application for partial or full exemption from the CFC charge (‘the exemption scheme’).

By decision of 2 April 2019, ( 1 ) the European Commission classified that exemption scheme as an unlawful State aid scheme incompatible with the internal market, in so far as it applied to profits arising from activities the significant human functions of which were carried out in the United Kingdom, since it was not justified either by the need to have administrable anti-avoidance rules or by the need to comply with the freedoms enshrined in the Treaties.

By contrast, in so far as the exemption scheme applied to profits arising from United Kingdom funds or assets, the Commission considered that, despite the a priori selective nature of those exemptions, they were justified in that they aimed to apply, in an administrable way, the rules applicable to CFCs.

The United Kingdom Government and ITV plc, ( 2 ) which had benefited from the exemption scheme (‘the applicants’), brought actions for annulment of the contested decision.

Those actions are dismissed by the Second Chamber (Extended Composition) of the General Court. In its judgment, the General Court confirms, inter alia, that the United Kingdom tax rules applicable to CFCs constitute an appropriate reference framework for assessing the selectivity of the exemption scheme since they form a body of tax rules, distinct from the general United Kingdom corporation tax system.

Findings of the Court

As regards the analysis of tax measures from the point of view of Article 107(1) TFEU, the Court notes, as a preliminary point, that the examination of both the criterion of advantage and that of selectivity requires that the normal tax rules forming the relevant reference framework for that examination be determined.

The Court rejects, first of all, the applicants’ pleas alleging errors of assessment on the part of the Commission, in that it had identified the tax rules applicable to CFCs as the reference framework.

In that regard, the Court points out that the reference framework cannot consist of some provisions of the domestic law of the Member State concerned that have been artificially taken from a broader legislative framework. On the other hand, where it appears that the measure is clearly severable from that general scheme, it cannot be ruled out that the reference framework to be taken into account may be more limited than the general scheme.

Thus, in so far as they seek to tax profits which have been artificially diverted from the United Kingdom by CFCs, the tax rules applicable to CFCs are based on a logic distinct from that underlying the general system of taxation in the United Kingdom, which covers profits made in the United Kingdom. Furthermore, in so far as they define specifically for the purpose of taxation of CFCs profits, inter alia, the tax base, the taxable person, the taxable event and the tax rates, those rules constitute a complete body of rules, distinct from the general corporation tax system in the United Kingdom.

Next, the Court rejects the applicants’ pleas alleging an error of assessment vitiating the finding as to the existence of an advantage. In so far as the exemption scheme made it possible to exempt from taxation certain profits which should have been subject to a CFC charge in that they had been artificially diverted from the United Kingdom, that system thus conferred an advantage on the companies benefiting from the exemptions.

As regards, finally, the applicants’ arguments alleging errors of assessment in the analysis of the selectivity of the exemption scheme, the Court states, first of all, that the Commission had correctly considered that the objective of the tax rules applicable to CFCs was limited to the taxation of CFCs profits artificially diverted from the United Kingdom, in order to protect the United Kingdom corporation tax base. The Court considers, moreover, that the Commission was correct in finding that the exemptions at issue, in that they exempt only CFCs non-trading finance profits arising from qualifying loans, to the exclusion of those arising from non-qualifying loans, lead to a difference in treatment of the two situations even though they are comparable, in the light of the objective pursued by those rules. Since both the profits arising from qualifying loans and those arising from non-qualifying loans were capable of being generated as a result of significant human functions carried out in the United Kingdom, the exclusion of non-qualifying loans from the exemptions at issue cannot be regarded as relating to specific situations of artificial diversion of profits.

In the light of those observations, the Court finds that, in view of the fact that the exemption scheme derogated from the tax rules applicable to CFCs and exempted only the non-trading finance profits of CFCs arising from qualifying loans, that system led to a difference in treatment of two comparable situations in the light of the objective of those rules and was, therefore, a priori selective.

The Court notes, moreover, that none of the circumstances put forward by the United Kingdom can justify that difference in treatment. Since it has not been established that the identification and location of the significant human functions carried out in the context of intra-group loans was part of a particularly costly exercise, the exemptions at issue could not be justified on grounds of administrative practicability. Furthermore, in so far as the taxation of a CFC charge applied only to profits regarded as having been artificially diverted, the imposition of such a charge cannot be regarded as constituting an obstacle to freedom of establishment. Accordingly, the exemptions at issue could not be justified by the need to comply with freedom of establishment.

Finally, the Court upholds the recovery of the aid ordered by the Commission from the beneficiaries of the exemptions at issue without providing for any derogation for cases in which no advantage has been obtained, observing that, in the case of an aid scheme, the Commission is not required to carry out an analysis of the aid granted in each individual case.

( 1 ) Commission Decision (EU) 2019/1352 of 2 April 2019 on the State aid SA.44896 implemented by the United Kingdom concerning CFC Group Financing Exemption (OJ 2019 L 216, p. 1; ‘the contested decision’).

( 2 ) ITV plc, a tax resident in the United Kingdom, is the holding company at the head of the ITV Group, which is active in the creation, production and distribution of audiovisual content over various platforms throughout the world. That group includes inter alia CFCs, such as ITV Entreprises BV and ITV (Finance) Europe BV, two companies formed under Netherlands law which had granted several loans to other companies in the ITV Group.