The Law Society of England and Wales has published a response in relation to the European Commission’s decision dated 26 October 2017 (the Decision) to investigate aspects of the UK’s tax rules for controlled foreign companies (CFCs).

In summary, we agree with the position that we understand to have been put forward by the UK government that, properly construed, Chapter 9 of Part 9A Tax (International and Other Provisions) Act 2010 (TIOPA) constitutes a delineation of the scope of the CFC rules, rather than an exemption from those rules and therefore forms part of the reference system for the purposes of a state aid analysis.

We disagree with the criticisms of Decision’s analysis. Even if Chapter 9 were to constitute a derogation, we consider that derogation does not result in enterprises in comparable legal and factual situations in view of the objectives of the reference system being treated differently, and we therefore do not agree that any derogation results in selective treatment.

In view of the need to have regard to the wider objectives of the UK’s tax legislation in relation to non-UK source income, it is in our view appropriate to regard the reference system for the purposes of this case as the general UK tax legislation as it applies to company taxation.

We believe certain aspects of the analysis in the Decision are based on incorrect assumptions about the underlying purpose and objective of the UK’s CFC rules. In our view, this has resulted in the Decision coming to an erroneous conclusion that there has been a selective derogation from the CFC rules in the case of group financing companies.