CJEU - Recent Developments in Direct Taxation 2024

1. The (partial) territorial nature of the UK corporate tax system

The proceedings in joined cases C-555/22 P, C-556/22 P and C-564/22 P concern the Commission’s Decision 2019/1352 of 2 April 2019 on State aid SA.44896 (the Decision), by which the Commission determined certain exemptions in the taxation of controlled foreign companies (CFC) in UK law, up to 2019, as amounting to unlawful State aid under the principles of Art 107 TFEU.

The fiscal background of the case is the following. As a general principle, only UK-sourced income is subject to UK corporate tax. There is no systematic group taxation regarding international subsidiaries implemented in UK tax law. Furthermore, profits attributable to foreign permanent establishments are exempt from UK corporate tax by way of the foreign branch exemption rules, and the distribution exemption rules exempt the profits of overseas companies that are distributed back to the UK. However, the territorial nature of the UK corporate tax system is not absolute. In order to protect the UK tax base from profit shifting S. 92and base erosion, the UK has implemented a CFC charge on a UK resident company for some or all of a foreign CFC’s profits under P...