In 2017 the European Commission concluded that Luxembourg had granted undue tax benefits to Amazon of around €250 million. According to the Commission, a tax ruling issued by Luxembourg in 2003 – and prolonged in 2011 – lowered the tax paid by Amazon in Luxembourg without any valid justification. The tax ruling enabled Amazon to shift the vast majority of its profits from an Amazon group company that is subject to tax in Luxembourg (Amazon EU) to a company which is not subject to tax (Amazon Europe Holding Technologies). In particular, the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU’s taxable profits. This decision was brought before the European Courts by Luxembourg and Amazon, and in May 2021 the General Court found that Luxembourg’s tax treatment of Amazon was not illegal under EU State aid rules. An appeal was then filed by the European Commission with the European Court of Justice. Judgement of the Court The European Court of Justice upheld the decision of the General Court and annulled the decision of the European Commission. However, it did so for different reasons. According to the Court of Justice, the OECD Transfer Pricing Guidelines were not part of the legal framework against which a selective advantage should be assessed, since Luxembourg had not implemented these guidelines. Thus, although the General Court relied on an incorrect legal framework, it had reached the correct result. Click here for other translation ...

In 2017, the European Commission concluded that Luxembourg in violation with EU state aid-rules had granted undue tax benefits to Amazon of around €250 million. According to the Commission, a tax ruling issued by Luxembourg in 2003 and extended in 2011 reduced the taxes paid by Amazon in Luxembourg without any valid justification. The tax ruling allowed Amazon to shift the vast majority of its profits from an Amazon group company subject to tax in Luxembourg (Amazon EU) to a company not subject to tax (Amazon Europe Holding Technologies). In particular, the tax ruling endorsed the payment of a royalty by Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU’s taxable profits. This decision was challenged by Luxembourg and Amazon before the European General Court. In a judgement issued in May 2021, the European General Court found that Luxembourg’s tax treatment of Amazon was not illegal under EU state aid rules. The Commission then filed an appeal with to the European Court of Justice. Preliminary Opinion of the Advocate General In a preliminary opinion, Advocate General Kokott proposes that the Court dismiss the Commission’s appeal. Excerpts: “109. The Commission – as the General Court stated in paragraph 530 of the judgment under appeal – had not succeeded in establishing that, had the profit split method on the basis of the contribution analysis been applied, LuxOpCo’s remuneration would have been greater. Accordingly, it held that the first subsidiary finding did not support the conclusion that the tax ruling at issue conferred an economic advantage on LuxOpCo. In the General Court’s view, apart from the fact that the Commission had not sought to determine what LuxOpCo’s arm’s length remuneration would have been in the light of the functions identified by the Commission in its own functional analysis, the first subsidiary finding contained no specific evidence to establish to the requisite legal standard that the errors in the functional analysis and the methodological error identified by the Commission, relating to the choice of method itself, had actually led to a reduction in LuxOpCo’s tax burden. 110. In addition, as the General Court noted with regard to the second subsidiary finding of an economic advantage (paragraph 547 of the judgment under appeal), it should be held that the Commission had not sought to ascertain that it was arm’s length remuneration or, a fortiori, whether LuxOpCo’s remuneration, endorsed by the tax ruling at issue, was lower than the remuneration that LuxOpCo would have received under arm’s length conditions. 111. Moreover, the General Court held in paragraph 585 of the judgment under appeal with regard to the third subsidiary finding that, as inappropriate as the ceiling mechanism may have been, and although it was not provided for in the 1995 version of the OECD Guidelines, the Commission had not demonstrated that that mechanism had an impact on the arm’s length nature of the royalty paid by LuxOpCo to LuxSCS. 112. Overall, the General Court concluded that the Commission had not succeeded in demonstrating the existence of an advantage through any of its three subsidiary findings (paragraphs 537, 548 and 586 of the judgment under appeal).” “(…)In accordance with settled case-law of the Court of Justice, it is for the Commission to prove the existence of ‘State aid’ as provided for in Article 107(1) TFEU and thus also to prove that the condition of granting an advantage to the beneficiaries is fulfilled. (42) That requires the Commission, in the present case, to demonstrate that Amazon received an advantage. However, the selective advantage only arises from the tax ruling conferring more favourable treatment compared to normal taxation. The Commission has to demonstrate such more favourable treatment. 119. The Commission must also carry out an overall assessment taking into account every significant element of the case in question which enables it to establish whether the recipient undertaking would not have received such relief already from the normal tax system (reference system). In the area of transfer pricing, that depends on the Commission being in a position to calculate the ‘correct’ transfer price. 120. The Commission is correct in its objection that that is very complex. However, it submits once more that not every misapplication of national tax law can simultaneously constitute a selective advantage, (43) but only manifestly erroneous findings in the tax ruling which affect the amount of tax due. 121. If the calculation of the royalty endorsed in the tax ruling would, in spite of its questionable methodology, have been lower than the usual transfer price, then there has been no more advantageous treatment of Amazon in comparison to normal taxation. After all, a higher normal transfer price would have resulted in an even lower tax burden. The General Court was correct in criticising the absence of such a comparison. In that respect, the second ground of appeal is also unfounded. C. Conclusion 122. In conclusion, both of the Commission’s grounds of appeal are unfounded. It has emerged that the judgment under appeal is correct in its outcome – albeit for reasons other than those on which the General Court relied. Apart from anything else, the decision had to be annulled because the reference system (the OECD Transfer Pricing Guidelines instead of Luxembourg law) relied on by the Commission was incorrect. 123. Moreover, the tax ruling does not contain any manifestly incorrect recognition – too favourable to the taxpayer – of the amount of the royalty payment. Even if the inclusion of a ceiling for the licence holder’s taxable income is manifestly incompatible with the method of calculating royalty payments usual between independent entities, the Commission failed to demonstrate in the decision that that also conferred an advantage.” Click here for other translations ...

In 2017 the European Commission concluded that Luxembourg granted undue tax benefits to Amazon of around €250 million.  Following an in-depth investigation the Commission concluded that a tax ruling issued by Luxembourg in 2003, and prolonged in 2011, lowered the tax paid by Amazon in Luxembourg without any valid justification. The tax ruling enabled Amazon to shift the vast majority of its profits from an Amazon group company that is subject to tax in Luxembourg (Amazon EU) to a company which is not subject to tax (Amazon Europe Holding Technologies). In particular, the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU’s taxable profits. This decision was brought before the European Court of Justice by Luxembourg and Amazon. Judgement of the EU Court  The European General Court found that Luxembourg’s tax treatment of Amazon was not illegal under EU State aid rules. According to a press release ” The General Court notes, first of all, the settled case-law according to which, in examining tax measures in the light of the EU rules on State aid, the very existence of an advantage may be established only when compared with ‘normal’ taxation, with the result that, in order to determine whether there is a tax advantage, the position of the recipient as a result of the application of the measure at issue must be compared with his or her position in the absence of the measure at issue and under the normal rules of taxation. In that respect, the General Court observes that the pricing of intra-group transactions carried out by an integrated company in that group is not determined under market conditions. However, where national tax law does not make a distinction between integrated undertakings and standalone undertakings for the purposes of their liability to corporate income tax, it may be considered that that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices. In those circumstances, when examining a fiscal measure granted to such an integrated company, the Commission may compare the tax burden of that undertaking resulting from the application of that fiscal measure with the tax burden resulting from the application of the normal rules of taxation under national law of an undertaking, placed in a comparable factual situation, carrying on its activities under market conditions. In addition, the General Court points out that, in examining the method of calculating an integrated company’s taxable income endorsed by a tax ruling, the Commission can find an advantage only if it demonstrates that the methodological errors which, in its view, affect the transfer pricing do not allow a reliable approximation of an arm’s length outcome to be reached, but rather lead to a reduction in the taxable profit of the company concerned compared with the tax burden resulting from the application of normal taxation rules. In the light of those principles, the General Court then examines the merits of the Commission’s analysis in support of its finding that, by endorsing a transfer pricing method that did not allow a reliable approximation of an arm’s length outcome to be reached, the tax ruling at issue granted an advantage to LuxOpCo.  In that context, the General Court holds, in the first place, that the primary finding of an advantage is based on an analysis which is incorrect in several respects. Thus, first, in so far as the Commission relied on its own functional analysis of LuxSCS in order to assert, in essence, that contrary to what was taken into account in granting the tax ruling at issue, that company was merely a passive holder of the intangible assets in question, the General Court considers that analysis to be incorrect. In particular, according to the General Court, the Commission did not take due account of the functions performed by LuxSCS for the purposes of exploiting the intangible assets in question or the risks borne by that company in that context.  Nor did it demonstrate that it was easier to find undertakings comparable to LuxSCS than undertakings comparable to LuxOpCo, or that choosing LuxSCS as the tested entity would have made it possible to obtain more reliable comparison data. Consequently, contrary to its findings in the contested decision, the Commission did not, according to the General Court, establish that the Luxembourg tax authorities had incorrectly chosen LuxOpCo as the ‘tested party’ in order to determine the amount of the royalty. Secondly, the General Court holds that, even if the ‘arm’s length’ royalty should have been calculated using LuxSCS as the ‘tested party’ in the application of the TNMM, the Commission did not establish the existence of an advantage since it was also unfounded in asserting that LuxSCS’s remuneration could be calculated on the basis of the mere passing on of the development costs of the intangible assets borne in relation to the Buy-In agreements and the cost sharing agreement without in any way taking into account the subsequent increase in value of those intangible assets. Thirdly, the General Court considers that the Commission also erred in evaluating the remuneration that LuxSCS could expect, in the light of the arm’s length principle, for the functions linked to maintaining its ownership of the intangible assets at issue. Contrary to what appears from the contested decision, such functions cannot be treated in the same way as the supply of ‘low value adding’ services, with the result that the Commission’s application of a mark-up most often observed in relation to intra-group supplies of a ‘low value adding’ services is not appropriate in the present case. In view of all the foregoing considerations, the General Court concludes that the elements put forward by the Commission in support of its primary finding are not capable of establishing that LuxOpCo’s tax burden was artificially reduced as a result of an overpricing of the royalty. In the second place, after examining the ...

Since June 2013, the European Commission has been investigating tax ruling practices of EU Member States. A Task Force was set up in summer 2013 to follow up on allegations of favourable tax treatment of certain companies, in particular in the form of unilateral tax rulings. The Treaty on the Functioning of the European Union (“TFEU”) provides that “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods shall, in so far as it affects trade between Member States, be incompatible with the internal market.”. The State aid rules ensures that the functioning of the internal market is not distorted by anticompetitive behavior favouring some to the detriment of others. In June 2014 the Commission initiated a series of State aid investigations on Multinational Corporations related to transfer pricing practices and rulings. Final decisions now have been published in cases against: Ireland/Apple (Appealed to the EU Court) Belgium/Excess Profit Exemption (Final decision by the EU Court) The Netherlands/Starbucks (Appealed to the EU Court) Luxembourg/Fiat (Appealed to the EU Court) And formal investigations have later on been opened against: Luxembourg/Amazon Luxembourg/McDonald’s Luxembourg/GDF Suez(now Engie) In December 2014 the Commission extended the investigation to tax rulings from all Member States. Follow these investigations on the European Commission homepage for State Aid, Tax rulings State Aid – Tax rulings See the “TAXE 1” report by the European Parliament’s Special Committee on Tax Rulings and Measures Similar in Nature or Effect (“the TAXE Committee”) below ...

Luxembourg gave illegal tax benefits to Amazon worth around €250 million The European Commission has concluded that Luxembourg granted undue tax benefits to Amazon of around €250 million.  Following an in-depth investigation launched in October 2014, the Commission has concluded that a tax ruling issued by Luxembourg in 2003, and prolonged in 2011, lowered the tax paid by Amazon in Luxembourg without any valid justification. The tax ruling enabled Amazon to shift the vast majority of its profits from an Amazon group company that is subject to tax in Luxembourg (Amazon EU) to a company which is not subject to tax (Amazon Europe Holding Technologies). In particular, the tax ruling endorsed the payment of a royalty from Amazon EU to Amazon Europe Holding Technologies, which significantly reduced Amazon EU’s taxable profits. The Commission’s investigation showed that the level of the royalty payments, endorsed by the tax ruling, was inflated and did not reflect economic reality. On this basis, the Commission concluded that the tax ruling granted a selective economic advantage to Amazon by allowing the group to pay less tax than other companies subject to the same national tax rules. In fact, the ruling enabled Amazon to avoid taxation on three quarters of the profits it made from all Amazon sales in the EU. Amazon’s structure in Europe The Commission decision concerns Luxembourg’s tax treatment of two companies in the Amazon group – Amazon EU and Amazon Europe Holding Technologies. Both are Luxembourg-incorporated companies that are fully-owned by the Amazon group and ultimately controlled by the US parent, Amazon.com, Inc. Amazon EU (the “operating company”) operates Amazon’s retail business throughout Europe. In 2014, it had over 500 employees, who selected the goods for sale on Amazon’s websites in Europe, bought them from manufacturers, and managed the online sale and the delivery of products to the customer.Amazon set up their sales operations in Europe in such a way that customers buying products on any of Amazon’s websites in Europe were contractually buying products from the operating company in Luxembourg. This way, Amazon recorded all European sales, and the profits stemming from these sales, in Luxembourg. Amazon Europe Holding Technologies (the “holding company”) is a limited partnership with no employees, no offices and no business activities. The holding company acts as an intermediary between the operating company and Amazon in the US. It holds certain intellectual property rights for Europe under a so-called “cost-sharing agreement” with Amazon in the US. The holding company itself makes no active use of this intellectual property. It merely grants an exclusive license to this intellectual property to the operating company, which uses it to run Amazon’s European retail business. Under the cost-sharing agreement the holding company makes annual payments to Amazon in the US to contribute to the costs of developing the intellectual property. The appropriate level of these payments has recently been determined by a US tax court. Under Luxembourg’s general tax laws, the operating company is subject to corporate taxation in Luxembourg, whilst the holding company is not because of its legal form, a limited partnership.Profits recorded by the holding company are only taxed at the level of the partners and not at the level of the holding company itself. The holding company’s partners were located in the US and have so far deferred their tax liability. Amazon implemented this structure, endorsed by the tax ruling under investigation, between May 2006 and June 2014. In June 2014, Amazon changed the way it operates in Europe. This new structure is outside the scope of the Commission State aid investigation. The scope of the Commission investigation The role of EU State aid control is to ensure Member States do not give selected companies a better tax treatment than others, via tax rulings or otherwise. More specifically, transactions between companies in a corporate group must be priced in a way that reflects economic reality. This means that the payments between two companies in the same group should be in line with arrangements that take place under commercial conditions between independent businesses (so-called “arm’s length principle”). The Commission’s State aid investigation concerned a tax ruling issued by Luxembourgto Amazon in 2003 and prolonged in 2011. This ruling endorsed a method to calculate the taxable base of the operating company. Indirectly, it also endorsed a method to calculate annual payments from the operating company to the holding company for the rights to the Amazon intellectual property, which were used only by the operating company. These payments exceeded, on average, 90% of the operating company’s operating profits. They were significantly (1.5 times) higher than what the holding company needed to pay to Amazon in the US under the cost-sharing agreement. To be clear, the Commission investigation did not question that the holding company owned the intellectual property rights that it licensed to the operating company, nor the regular payments the holding company made to Amazon in the US to develop this intellectual property. It also did not question Luxembourg’s general tax system as such. Commission assessment The Commission’s State aid investigation concluded that the Luxembourg tax ruling endorsed an unjustified method to calculate Amazon’s taxable profits in Luxembourg. In particular, the level of the royalty payment from the operating company to the holding company was inflated and did not reflect economic reality. The operating company was the only entity actively taking decisions and carrying out activities related to Amazon’s European retail business. As mentioned, its staff selected the goods for sale, bought them from manufacturers, and managed the online sale and the delivery of products to the customer. The operating company also adapted the technology and software behind the Amazon e-commerce platform in Europe, and invested in marketing and gathered customer data. This means that it managed and added value to the intellectual property rights licensed to it. The holding company was an empty shell that simply passed on the intellectual property rights to the operating company for its exclusive use. The holding company was not itself in any way ...

The US Treasury in 2016 strongly criticized the European Commission for it’s state aid actions relating to US Corporations; Apple, Starbucks, Amazon, and McDonald’s. US Treasury white paper of August 2016 US Treasury letter of February 2016 ...

The European Commission has opened an in-depth investigation to examine whether the decision by Luxembourg’s tax authorities with regard to the corporate income tax to be paid by Amazon in Luxembourg comply with the EU rules on state aid. The opening of an in-depth investigation gives interested third parties and the Member States concerned an opportunity to submit comments. It does not prejudge the outcome of the investigation. The tax ruling in favour of Amazon under investigation dates back to 2003 and is still in force. It applies to Amazon’s subsidiary Amazon EU Sàrl, which is based in Luxembourg and records most of Amazon’s European profits. Based on a methodology set by the tax ruling, Amazon EU Sàrl pays a tax deductible royalty to a limited liability partnership established in Luxembourg but which is not subject to corporate taxation in Luxembourg. As a result, most European profits of Amazon are recorded in Luxembourg but are not taxed in Luxembourg. The Commission considers that the amount of this royalty, which lowers the taxable profits of Amazon EU Sàrl each year, might not be in line with market conditions. The Commission has concerns that the ruling could underestimate the taxable profits of Amazon EU Sàrl, and thereby grant an economic advantage to Amazon by allowing the group to pay less tax than other companies whose profits are allocated in line with market terms. The Commission will now continue investigating to determine whether its concerns are confirmed ...

Follow the work of the UK Parliament, House of Commons Committee of Public Account, on corporate tax avoidance schemes. http://www.parliament.uk/business/committees/committees-a-z/commons-select/public-accounts-committee/taxation/ Statements from Amazon, Google and Starbucks, November 2012 Statement from Google June 2013 ...