European Commission illegal state aid investigations

UK Controlled Foreign Companies (CFC) rules

In October 2017, the European Commission announced it had commenced a formal state aid investigation into certain aspects of the UK’s CFC rules. The investigation focusses on the Group Financing Exemption (GFE), which essentially subjects profits from overseas financing to UK tax at an effective rate of up to 4.75%. The investigation will consider whether this exemption, allowed under the UK tax rules, constitutes illegal state aid.

As we were party to litigation in relation to our Luxembourg financing activities under the previous CFC rules, and as an interested party who could potentially be impacted by any outcome of the investigation, we welcomed the opportunity to submit observations to the Commission. We shared our view on issues including European and UK law, comparable legal and factual situations, proportionality and appropriate reference points.

In April 2019 the European Commission published its full decision in relation to its investigation into the GFE in the UK’s controlled foreign company rules and whether the GFE constituted unlawful State Aid. They concluded the GFE does not constitute unlawful state aid when the managing of the financing activities is properly established outside the UK.We undertake no artificial tax avoidance activities in respect to our Luxembourg financing activities (or any other subsidiary or activity). Our Luxembourg entities are properly established and carry out genuine economic activities. We therefore do not believe that questions of artificiality arise in any analysis of our business And do not expect any adverse findings as a result of the Commission’s investigation.

Advance tax agreements

Vodafone has received advance tax agreements from the Luxembourg authorities in order to confirm that the standard provisions of the Luxembourg tax regime apply to our facts and circumstances. Such agreements are a standard part of most countries’ administrative tax practices, are open to any company, and do not in themselves constitute state aid if they merely give certainty to a company as to how the relevant laws are to be applied in practice (whether in relation to complex commercial transactions or to areas of uncertainty in domestic or international tax law). These agreements may be provided on an informal or formal basis.

In the Commission’s view, the tax rulings provided in the cases under investigation went far beyond simple advance tax agreements, to the extent that the companies involved allegedly gained an advantage over their competitors. Vodafone has not entered into any special agreements with the Luxembourg tax authorities and none of our interactions amount to any form of bespoke arrangement with, or preferential treatment from, those authorities. We are therefore not the focus of any related European Commission investigation.