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 ...

The issue was whether the benefits provided by the Argentina-Spain DTC were available to Empresa Distribuidora La Plata S.A., which was owned by two Spanish holding companies, Inversora AES Holding and Zargas Participaciones SL, whose shareholders were Uruguayan holding companies. The Argentine Personal Assets Tax provided that participations in Argentine companies held by non-resident aliens were generally subject to an annual tax of 0.5% or 0.25% on the net equity value of their participation. However, under the Argentina-Spain DTC, article 22.4, only the treaty state where the shareholders were located (Spain) had the right to tax the assets. On this basis, Empresa Distribuidora La Plata S.A. considered that its shares held by Spanish holding companies were not subject to the Personal Assets Tax. The tax authorities disagreed, finding that the Spanish holding companies lacked substance and that the benefits of the Argentina-Spain DTC were therefore not applicable. Judgement of the Tax Court The Tax Court ruled in favour of the tax authorities. The Court held that the treaty benefits did not apply. The Court agreed with the findings of the tax authorities that the Spanish companies had been set up for the sole purpose of benefiting from the Spain-Argentina DTC and therefore violated Argentina’s general anti-avoidance rule. Excerpt “According to the administrative proceedings, based on the background information requested from the International Taxation Directorate of the Spanish Tax Agency and other elements collected by the audit, it appears that: a) the company Inversora AES Americas Holding S.L., is made up as partners by AES Argentina Holdings S.C.A. and AES Platense Investrnents Uruguay S.C.A., both Uruguayan companies; b) the company Zargas Participaciones S.L., has as its sole partner ISKARY S.A., also a Uruguayan company. The purpose of the former is the management and administration of securities representing the equity of companies and other entities, whether or not they are resident in Spanish territory, investment in companies and other entities, whether or not they are resident in Spanish territory, and it has only three employees (one administrative and two in charge of technical areas) and has opted for the Foreign Securities Holding Entities Regime (ETVE). The second company, whose purpose is the management and administration of securities representing the equity of non-resident entities in Spanish territory, has had no employees on its payroll since its incorporation, and has also opted for the ETVE regime. Neither of the two companies is subject to taxation in their own country similar to that in the present case. According to the information provided by the Spanish Tax Agency (see fs. 34 of the Background Zargas Participaciones SL), there is no record that it has any shareholdings in the share capital of other companies. The evidence and circumstances of the case show that the Spanish companies lack genuine economic substance, with the companies AES Argentina Holdings S.C.A. and AES Platense Investments Uruguay S.C.A. (both Uruguayan) holding the shares of Inversora AES Americas Holding S.L. and the company ISKARY S.A. (also Uruguayan) holding 100% of the shares of Zargas Participaciones S.L. Thus, it is reasonable to conclude that the main purpose of their incorporation was to obtain the benefits granted by the Convention by foreign companies from a third country outside the scope of application of the treaty, without the plaintiff having been able to prove with the evidence produced in the proceedings that the Spanish companies carried out a genuine economic activity and that, therefore, they were not mere legal structures without economic substance (in the same sense CNCAF, Chamber I, in re “FIRST DATA CONO SUR S.R.L.” judgement of 3/12/2019). Consequently, the tax criterion should be upheld. With costs.” Click here for English Translation Click here for other translation ...

As indicated in paragraph 8.9, the economically relevant characteristics of the arrangement identified under the guidance in Section D of Chapter I may indicate that the actual transaction differs from the terms of the CCA purportedly agreed by the participants. For example, one or more of the claimed participants may not have any reasonable expectation of benefit from the CCA activity. Although in principle the smallness of a participant’s share of expected benefits is no bar to eligibility, if a participant that is performing all of the subject activity is expected to have only a small fraction of the overall expected benefits, it may be questioned whether the reality of the arrangements for that party is to pool resources and share risks or whether the appearance of sharing in mutual benefits has been constructed to obtain more favourable tax results. The existence of significant balancing payments arising from a material difference between the parties’ proportionate shares of contributions and benefits may also give rise to questions about whether mutual benefits exist or whether the arrangements should be accurately delineated, taking into account all the economically relevant characteristics, as a funding transaction ...

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 ...

In this case the Third Circuit of Appeal upheld the tax courts prior decision i a $377 million dispute involving the affiliate of a US based commodities trader. The Court found that SIH Partners LLLP, an affiliate of Pennsylvania-based commodities trader Susquehanna International Group LLP, owed taxes on approximately $377 million in additional income. The extra earnings stemmed from a $1.5 billion loan from Bank of America brokerage Merrill Lynch, which was guaranteed by SIH’s subsidiaries in Ireland and the Cayman Islands. The Tax Court’s ruling was based on regulations under Section 956 of the Internal Revenue Code, which states that U.S. shareholders must include their controlled foreign corporations’ applicable earnings, up to the amount of such a loan, in their own income when the foreign units invest in U.S. property ...

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 ...

As indicated in paragraph 8.9, the economically relevant characteristics of the arrangement identified under the guidance in Section D of Chapter I may indicate that the actual transaction differs from the terms of the CCA purportedly agreed by the participants. For example, one or more of the claimed participants may not have any reasonable expectation of benefit from the CCA activity. Although in principle the smallness of a participant’s share of expected benefits is no bar to eligibility, if a participant that is performing all of the subject activity is expected to have only a small fraction of the overall expected benefits, it may be questioned whether the reality of the arrangements for that party is to pool resources and share risks or whether the appearance of sharing in mutual benefits has been constructed to obtain more favourable tax results. The existence of significant balancing payments arising from a material difference between the parties’ proportionate shares of contributions and benefits may also give rise to questions about whether mutual benefits exist or whether the arrangements should be accurately delineated, taking into account all the economically relevant characteristics, as a funding transaction ...