In 1991 and 2007, Ireland issued two tax rulings in relation to two companies of the Apple Group (Apple Sales International – ASI and Apple Operations Europe – AOE), incorporated under Irish law but not tax resident in Ireland. The rulings approved the method by which ASI and AOE proposed to determine their chargeable profits in Ireland deriving from the activity of their Irish branches. In 2016, the European Commission considered that the tax rulings, by excluding from the tax base the profits deriving from the use of intellectual property licences held by ASI and AOE, granted those companies, between 1991 and 2014, State aid that was unlawful and incompatible with the internal market and from which the Apple Group as a whole had benefitted, and ordered Ireland to recover that aid. In 2020, on the application of Ireland and ASI and AOE, the General Court of the European Union annulled the Commission’s decision, finding that the Commission had not shown that there was an advantage deriving from the adoption of the tax rulings. The Commission lodged an appeal with the Court of Justice, asking it to set aside the judgment of the General Court. Opinion of the AG In his Opinion, Advocate General Giovanni Pitruzzella proposes that the Court set aside the judgment and refer the case back to the General Court for a new decision on the merits. According to the Advocate General, the General Court committed a series of errors in law when it ruled that the Commission had not shown to the requisite legal standard that the intellectual property licences held by ASI and AOE and related profits, generated by the sales of Apple products outside the USA, had to be attributed for tax purposes to the Irish branches. The Advocate General is also of the view that the General Court failed to assess correctly the substance and consequences of certain methodological errors that, according to the Commission decision, vitiated the tax rulings. In the Advocate General’s opinion, it is therefore necessary for the General Court to carry out a new assessment ...

In 2013 “A” SARL requested a tax ruling confirming that its US branch had sufficient substance to qualify as a permanent establishment. The tax authorities issued the ruling conferming this to be the case, but only premised on the information provided by “A” SARL. The ruling would not be valid if the facts or circumstances described therein were incomplete or inaccurate. In 2016, “A” SARL filed an amended tax return for 2013 in which it had effectively allocated a dividend in kind to the US branch. Despite of the above mentioned tax ruling, the tax authorities disallowed the amendments to the tax return, finding that the US branch did not have sufficient substance to qualify as a permanent establishment. Not satisfied with the decision “A” SARL filed an appeal with the Administrative Court. Judgement of the Administrative Tribunal The Court decided in favour of the tax authorities and denied the recognition of US permanent establishment. Excerpt (in English) “In view of all the inconsistencies noted above in relation to (i) the date on which the Branch was set up, (ii) the transfer to the Branch of the claimant company’s shareholdings in company “M” and (iii) the distribution of the dividend to the claimant company, and in the absence of detailed and concrete explanations from the plaintiff company concerning, in particular, the contradictions in the dates mentioned in the various resolutions of its Board of Directors, respectively in its initial and amending tax returns, the allegation that the disputed dividend in kind was attributed to it via the branch must be rejected as being unsupported by any tangible evidence. Indeed, it would have been incumbent on the plaintiff company to provide documents that would have made it possible to establish irrevocably and indisputably that the disputed bonds had first been transferred by “M” to the branch before being subsequently reallocated to it by the branch, such as, for example, a copy of the decision by the shareholders of “F” to distribute a dividend in kind to the branch, with a precise indication of the date of payment, proof of the registration of the bonds in “M”‘s share account, proof of the transfer of the bonds to “F”‘s share account, proof of the transfer of the bonds to “M”‘s share account, proof of the transfer of the bonds to “F”‘s share account, proof of the transfer of the bonds to “M”‘s share account and proof of the transfer of the bonds to “F”‘s share account. bonds to the branch’s securities account, or a copy of the minutes and decisions taken by the manager of the US Branch, and in particular a document issued by the latter stating that the … Eurobonds were continued by the branch to the plaintiff company after July 11, 2013 at 4:30 p.m., i.e. the time when, according to the aforementioned letter of July 11, 2013, the branch would have been allocated the plaintiff company’s holdings in company “F”, or, if applicable, on July 12, 2013, which it nevertheless remains in default of doing. This conclusion is not shaken by the documents submitted by the plaintiff company to establish the existence of a permanent establishment in the United States within the meaning of Article 5 of the Convention, namely the certificate of registration of the Stable Establishment with the Connecticut revenue authorities, the branch’s bank account details and the copy of the service contract between the branch and the American company “H”. Indeed, it must be noted that the certificate of registration of the Stable Establishment with the Connecticut Revenue Service contains no precise date, so that it has not been established that the said establishment was actually created on July 11, 2013, as the plaintiff company maintains. As for the other two documents, they are irrelevant to the issue of the actual transfer of the dividend in kind to the branch, and must therefore be rejected as irrelevant in this respect. The same is true of the copy of the document described by the plaintiff company as a “copy of the confirmation of the listing of the Eurobonds on the Jersey Stock Exchange”, dated October 9, 2013, which, in the absence of more detailed explanations, does not allow us to conclude that the disputed bonds were actually reallocated to the plaintiff company via the branch on July 12, 2013. It follows that it has not been unequivocally established that the key elements of the transaction in the present case correspond to those described in the request for an advance ruling, so that the ACD was not obliged to comply with it, in particular as regards the recognition of the branch as a permanent establishment and consequently the taxation of its profits in the United States. It follows from all the foregoing considerations that the tax office rightly refused to take into consideration the new tax balance sheet as provided by the plaintiff company together with the rectifying tax return dated November 15, 2016, so that the bulletins for community income tax and communal business tax for the year 2013, issued on September 21, 2016 are to be confirmed. It follows from all the foregoing considerations that the appeal is not well-founded in any of its pleas, so that the plaintiff company is to be dismissed.” Click here for English translation Click here for other translation ...

Since 2005, Belgium has applied a tax regime under which group companies could apply for tax exemptions on excess profits. The exemption could be obtained through a tax ruling from the Belgian tax authorities if the existence of a new situation could be demonstrated, i.e. a reorganisation leading to the relocation of the central entrepreneur to Belgium, the creation of jobs or investments. Profits were considered ‘excessive’ in the sense that they exceeded the profits that would have been made by comparable independent companies operating in similar circumstances and were exempted from corporate income tax. In 2016, the Commission found that the Belgian scheme constituted state aid that was unlawful and incompatible with the single market and ordered the recovery of the aid from 55 companies that had benefited from the practice. On 14 February 2019, the General Court annulled the Commission’s decision. It found, inter alia, that the Commission had wrongly concluded that the excess profits exemption scheme did not require further implementing measures and that the scheme therefore constituted an ‘aid scheme’ within the meaning of Regulation 2015/1589. It also rejected the Commission’s arguments concerning the existence of an alleged ‘systematic approach’ by the Belgian tax authorities. The Commission appealed to the Court of Justice and on 16 September 2002 the Court of Justice overturned the judgement of the General Court and ruled that the Commission had correctly established the existence of an unlawfull state aid scheme. Judgement of the EU General Court In this case, European Commission v Belgium, the General Court upheld the Commission’s 2016 decision, finding that the Belgian excess profits tax scheme constitutes unlawful state aid. Click here for other translations ...

In 2012, the Luxembourg tax authorities issued a tax ruling in favour of Fiat Chrysler Finance Europe (‘FFT’), an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe. The tax ruling at issue endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in Luxembourg. In October 2015, the Commission concluded that the tax ruling constituted State aid under Article 107 TFEU and that it was operating aid that was incompatible with the internal market. The Commission found that the Grand Duchy of Luxembourg was required to recover the unlawful and incompatible aid from FFT. FFT brought an action before the General Court for annulment of the Commission’s decision. In it’s Judgement of September 2019, the General Court dismissed the actions brought by FFT and confirmed the validity of the Commission’s decision. This decision was then appealed to the European Court of Justice by FFT. In December 2021 the Advocate General Opinion was published. The AG opined that the decisions of the General Court should be set aside because the arm’s length principle had been used incorrectly as the benchmark for “normal” taxation in Luxembourg at that time. Judgement of the Court of Justice of the European Union The Court set aside the judgment delivered by the General Court on 24 September 2019 in the case Luxembourg and Fiat Chrysler Finance Europe v Commission (Joined Cases T-755/15 and T-759/15) and annuls the decision of the Commission of 21 October 2015 on the State aid granted by Luxembourg to FFT. The Court holds that the General Court was wrong to confirm the reference framework used by the Commission to apply the arm’s length principle to integrated companies in Luxembourg, in failing to take into account the specific rules implementing that principle in that Member State As a preliminary point, the Court recalls that action by Member States in areas that are not subject to harmonisation by EU law is not excluded from the scope of the provisions of the FEU Treaty on monitoring State aid. It next recalls that the classification of a national measure as ‘State aid’ requires four conditions to be fulfilled. First, there must be an intervention by the State or through State resources. Second, the intervention must be liable to affect trade between the Member States. Third, it must confer a selective advantage on the beneficiary. Fourth, it must distort or threaten to distort competition. As part of the analysis of tax measures, from the perspective of EU State aid law, the examination of the condition relating to selective advantage involves, as a first step, identifying the reference system, that is the ‘normal’ tax system applicable in the Member State concerned, then demonstrating, as a second step, that the tax measure at issue is a derogation from that reference system, in so far as it differentiates between operators who, in the light of the objective pursued by that system, are in a comparable factual and legal situation, without finding any justification with regard to the nature or scheme of the system in question. For the purposes of assessing the selective nature of a tax measure, it is, therefore, necessary that the common tax regime or the reference system applicable in the Member State concerned be correctly identified in the Commission decision and examined by the court hearing a dispute concerning that identification. In that regard, the Court concludes that, in so far as, outside the spheres in which EU tax law has been harmonised, it is the Member State concerned which determines, by exercising its own competence in the matter of direct taxation and with due regard for its fiscal autonomy, the characteristics constituting the tax, only the national law applicable in the Member State concerned must be taken into account in order to identify the reference system for direct taxation, that identification being itself an essential prerequisite for assessing not only the existence of an advantage, but also whether it is selective in nature. According to the Court of Justice, the General Court committed an error of law in the application of Article 107(1) TFEU by failing to take account of the requirement arising from the case-law, according to which, in order to determine whether a tax measure has conferred a selective advantage on an undertaking, it is for the Commission to carry out a comparison with the tax system normally applicable in the Member State concerned, following an objective examination of the content, interaction and concrete effects of the rules applicable under the national law of that State. The General Court was wrong to endorse the approach consisting in applying an arm’s length principle different from that defined by Luxembourg law, confining itself to identifying the abstract expression of that principle in the objective pursued by the general corporate income tax in Luxembourg and to examining the tax ruling at issue without taking into account the way in which the said principle has actually been incorporated into that law with regard to integrated companies in particular. In addition, by accepting that the Commission may rely on rules which were not part of Luxembourg law, even though it recalled that that institution did not, at that stage of development of EU law, have the power autonomously to define the ‘normal’ taxation of an integrated company, disregarding national tax rules, the General Court infringed the provisions of the FEU Treaty relating to the adoption by the European Union of measures for the approximation of Member State legislation relating to direct taxation. The Court concludes that the grounds of the judgment under appeal relating to the examination of the Commission’s principal line of reasoning, according to which the tax ruling at issue derogated from the general Luxembourg corporate income tax system, are vitiated by an error of law in that the General Court validated the Commission’s approach. More specifically, that error consisted, in ...

At issue in this case is whether the arm’s length principle as described in the OECD Transfer Pricing Guidelines can be applied by the EU in determining if state aid had been granted. In 2012, the Luxembourg tax authorities issued a tax ruling in favour of Fiat Chrysler Finance Europe (‘FFT’), an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe. The tax ruling at issue endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in the Grand Duchy of Luxembourg. In 2015, the Commission concluded that the tax ruling constituted State aid under Article 107 TFEU and that it was operating aid that was incompatible with the internal market. The Commission found that the Grand Duchy of Luxembourg was required to recover the unlawful and incompatible aid from FFT. FFT brought an action before the General Court for annulment of the Commission’s decision. In it’s Judgement of September 2019 Union , the General Court dismissed the actions brought by FFT and confirmed the validity of the Commission’s decision. This decision was then appealed to the European Court of Justice by FFT. At the same time, Ireland filed an appeal in regards of application of the arm’s length principle in state aid cases. According to Ireland, applying the arm’s length principle in these cases was in breach of the principle of legal certainty. AG Opinion from the European Court of Justice The Advocate General proposes that the Court dismiss the appeal brought by Ireland in its entirety. The Advocate General considers in particular that the General Court correctly held that the Commission was not required to take account of the intra-group and cross-border dimension of the effects of the tax ruling at issue when determining whether that ruling conferred an economic advantage, and that the three errors made, according to the Commission, in the calculation of the remuneration of the treasury and financing services provided by FFT prevented an arm’s length outcome from being obtained and could therefore form the basis for a finding of economic advantage. Excerpt “178. The principle of legal certainty, which is a general principle of EU law and thus applies to the acts of the institutions, bodies, offices and agencies of the European Union, requires, according to settled case-law, that rules of law must be clear and precise and that they must be foreseeable. (81) More specifically, that principle requires an assessment of whether an EU legal act enables those concerned to know precisely and unequivocally the extent of their rights and obligations and to take steps accordingly. (82) This requirement must be observed all the more strictly in the case of an act liable to have financial consequences. (83) 179. It is apparent from the case-law of the Court of Justice that the principle of legal certainty is intrinsically linked to the development of legal standards by the European Union, and by national authorities when they implement EU law, and that it permits judicial review of flaws liable to result in unpredictable application of the legal act in question. (84) 180. The principle of legal certainty is narrower in scope with regard to an administrative decision, as is apparent from the case-law on State aid. In that area, the Court of Justice has found the principle of legal certainty to have been infringed only where the conduct in question had been engaged in by the Commission before or during the procedure leading to the adoption of a decision to recover State aid. (85) 181. In the present case, the principle of legal certainty is relied on in opposition to the use, for the purposes of determining whether the requirement for an advantage was fulfilled, of the arm’s length principle, on the ground that the scope of that principle was not defined. In other words, what is challenged is the substantive validity of an assessment made by the Commission in relation to the characterisation of a State measure as State aid. However, the substantive validity of such an assessment cannot be challenged on the basis of conformity with the principle of legal certainty. To hold otherwise would be to prohibit the Commission from conceiving new approaches in the application of rules of law, leaving it frozen in its current position. In particular, such an interpretation would mean that the Commission is prevented from using any novel benchmark to guide its assessment of whether there is an advantage for the purposes of Article 107(1) TFEU. 182. Having regard to the case-law referred to above and to the fact that FFT’s criticism relates, ultimately, to the finding of advantage made for the purposes of characterising the tax ruling at issue as State aid, I must conclude that the principle of legal certainty cannot be legitimately relied on in the present case. Thus, no error of law can be attributed to the General Court on the basis that it did not disapprove the characterisation of the scope of the arm’s length principle which emerges from the decision at issue. I therefore consider that the first part of the third ground of appeal must be rejected. 183. In any event, the General Court was right to hold, in response to the arguments advanced respectively by FFT and the Grand Duchy of Luxembourg and set out in paragraphs 155 and 176 of the judgment under appeal, that the Commission had sufficiently defined the scope and content of the arm’s length principle applied in the decision at issue, and that that definition was thus not open to criticism on the basis that the discretion left to the Commission in applying that principle was overly broad. I am thinking particularly of the General Court’s observations that the arm’s length principle is ‘a tool for checking that intra-group transactions are remunerated as though they had been negotiated between independent undertakings’ and that the examination in the light ...

In 2012, the Luxembourg tax authorities issued a tax ruling in favour of Fiat Chrysler Finance Europe (‘FFT’), an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe. The tax ruling at issue endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in the Grand Duchy of Luxembourg. In 2015, the Commission concluded that the tax ruling constituted State aid under Article 107 TFEU and that it was operating aid that was incompatible with the internal market. The Commission found that the Grand Duchy of Luxembourg was required to recover the unlawful and incompatible aid from FFT. FFT brought an action before the General Court for annulment of the Commission’s decision. In it’s Judgement of September 2019 Union , the General Court dismissed the actions brought by FFT and confirmed the validity of the Commission’s decision. This decision was then appealed to the European Court of Justice by FFT. AG Opinion from the European Court of Justice The Advocate General opined that the decisions of the General Court should be set aside because the arm’s length principle had been used incorrectly as the benchmark for “normal” taxation in Luxembourg at that time. Excerpts “…I share Ireland’s view that the approach adopted by the Commission in the decision at issue and endorsed by the General Court in the judgment under appeal ultimately amounts to introducing into the national tax system constituting ‘normal’ taxation a rule, namely the arm’s length principle, which is extraneous to that system. For the reasons set out inter alia in the preceding point, the reference to the purported objective pursued by the national legislature is not capable of justifying the arm’s length principle’s belonging to the said system.” “110. It has not escaped my attention that, if the arm’s length principle were incorporated into the national legal order, the number of national tax authorities whose tax rulings might be subject to Commission scrutiny from a State aid perspective would be reduced and the OECD guidelines would become de facto binding by restricting the Commission’s discretion in examining those rulings. Nevertheless, this is, in my view, the only reasoning that the General Court can regard as legally correct, since it respects the exclusive competence of the Member States in matters of direct taxation. 111. By contrast, the legal reasoning followed by the Commission, principally, and endorsed by the General Court in the judgment under appeal defines the reference framework constituting ‘normal’ taxation by relying on a version of the arm’s length principle based on an uncodified element such as the (purported) objective of Luxembourg tax law. Is this not precisely the undue interference in the Member States’ tax autonomy which the Court has always carefully condemned until now? I think that it is.” ” It follows from the reasoning set out in points 101 to 113 and points 167 to 174 of this Opinion that the General Court committed an error of law, in the judgment under appeal, in approving the examination of the existence of an economic advantage on the basis of a reference framework comprising an arm’s length principle which does not derive from national tax law and thereby also infringed the provisions governing the division of competences between the European Union and its Member States.” Click here for English Version of the Opinion ...

Since 2005, Belgium has applied a system of exemptions for the excess profit of Belgian entities which form part of multinational corporate groups. Those entities were able to obtain a tax ruling from the Belgian tax authorities, if they could demonstrate the existence of a new situation, such as a reorganisation leading to the relocation of the central entrepreneur to Belgium, the creation of jobs, or investments. In that context, profits regarded as being ‘excess’, in that they exceeded the profit that would have been made by comparable stand-alone entities operating in similar circumstances, were exempted from corporate income tax. In 2016, the Commission found that that system of excess profit exemptions constituted a State aid scheme that was unlawful and incompatible with the internal market and ordered the recovery of the aid thus granted from 55 beneficiaries, including the company Magnetrol International. Belgium and Magnetrol International brought an action before the General Court of the European Union seeking the annulment of the Commission’s decision. On 14 February 2019, the General Court annulled the Commission’s decision. It found, inter alia, that the Commission had wrongly concluded that the excess profit exemption scheme did not require further implementing measures and that that scheme therefore constituted an ‘aid scheme’ within the meaning of Regulation 2015/1589. It also rejected the Commission’s arguments relating to the existence of an alleged ‘systematic approach’ by the Belgian tax authorities. On 24 April 2019, the Commission brought an appeal before the Court of Justice. According to the Commission, the General Court made errors in the interpretation of the definition of an ‘aid scheme’. The Judgement of the European Court of Justice The Court of Justice overturned the judgement of the General Court and ruled that the Commission correctly found that there was an aid scheme. The Court therefore sets aside the judgment delivered on 14 February 2019 by the General Court and referred the case back to the latter for it to rule on other aspects of the case. In its decision the Court of Justice notes that, for a state measure to be classified as an aid scheme, three cumulative conditions must be satisfied. First, aid may be granted individually to undertakings on the basis of an act. Secondly, no further implementing measure is required for that aid to be granted. Thirdly, undertakings to which individual aid may be granted must be defined ‘in a general and abstract manner’. As regards, first of all, the first condition, the Court clarifies the concept of an ‘act’. It confirms that the term may also refer to a consistent administrative practice by the authorities of a Member State where that practice reveals a ‘systematic approach’. Although the General Court found that the legal basis of the scheme at issue resulted not only from a provision of the Code des impôts sur les revenus 1992 (Income Tax Code 1992; ‘CIR 92’), 3 but also from the application of that provision by the Belgian tax authorities, it did not, however, draw all the appropriate conclusions from that finding. In particular, it did not take account of the fact that the Commission inferred the application of that provision not only from certain acts, 4 but also from a systematic approach on the part of those authorities. The General Court did, however, rely on the incorrect premise that the fact that certain key facts of the scheme at issue were not apparent from those acts, but from the rulings themselves, meant that those acts necessarily had to be the subject of further implementing measures. Consequently, by limiting its analysis to only the abovementioned normative acts, the General Court misapplied the term ‘act’. Next, as regards the second condition for defining an ‘aid scheme’, namely that no ‘further implementing measures’ are required, the Court of Justice notes that that issue is intrinsically linked to the determination of the ‘act’ on which that scheme is based. In the context of that examination, the General Court failed to take account of the fact that one of the essential characteristics of the scheme at issue lay in the fact that the Belgian tax authorities had systematically granted the excess profit exemption when the conditions were satisfied. Contrary to what the General Court held, the identification of such a systematic practice was capable of constituting a relevant factor in order to establish, where applicable, that the tax authorities did not in fact have any discretion. As regards the third condition defining an ‘aid scheme’, namely that the beneficiaries of the excess profit exemption are defined ‘in a general and abstract manner’, the Court of Justice notes that that issue is also intrinsically linked to the first two conditions, relating to the existence of an ‘act’ and the absence of ‘further implementing measures’. Accordingly, the errors of law made by the General Court concerning the first two conditions vitiated its assessment of the definition of the beneficiaries of the excess profit exemption. The Court of Justice therefore concludes that the General Court made several errors of law. Furthermore, as regards proof of the existence of a ‘systematic approach’, the Court of Justice finds that the sample of rulings examined by the Commission (22 selected in a weighted manner from a total of 66) is, by its nature, capable of representing a ‘systematic approach’ taken by the Belgian tax authorities. The Court of Justice therefore sets aside the judgment of the General Court. However, it finds that the state of the proceedings does not permit final judgment to be given as regards the pleas alleging, in essence, the incorrect classification of the excess profit exemption as State aid, in view of, inter alia, the absence of any advantage or selectivity, and as regards the pleas in law alleging, inter alia, infringement of the principles of legality and protection of legitimate expectations, in so far as the recovery of the alleged aid was incorrectly ordered, including from the groups to which the beneficiaries of that aid belong. The Court of Justice ...

In 2016 the European Commission announced that it had opened an in-depth investigation to examine whether tax rulings (unilateral APA’s) granted by the Netherlands had given Nike an unfair advantage over its competitors, in breach of EU State aid rules. The formal investigation concerned the tax treatment in the Netherlands of two Nike group companies, Nike European Operations Netherlands BV and Converse Netherlands BV. These two operating companies develops, markets and records the sales of Nike and Converse products in Europe, the Middle East and Africa (the EMEA region). Nike European Operations Netherlands BV and Converse Netherlands BV obtained licenses to use intellectual property rights relating to Nike and Converse products in the EMEA region. The two companies obtained the licenses, in return for a tax-deductible royalty payment, from two Nike group entities, which are currently Dutch entities that are “transparent” for tax purposes (i.e., not taxable in the Netherlands). From 2006 to 2015, the Dutch tax authorities issued five tax rulings, two of which are still in force, endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property. As a result of these tax rulings, Nike European Operations Netherlands BV and Converse Netherlands BV are only taxed in the Netherlands on a limited operating margin based on sales. The Commission was concerned that the royalty payments endorsed by the rulings may not reflect economic reality. According to the Commission the payments appeared to be higher than what independent companies negotiating on market terms would have agreed. On 26 September 2019 Nike brought the decision to open the investigation to the European General Court claiming the investigation was in breach of fundamental  EU rights, principles of good administration and equal treatment by (1) erring in law in the preliminary assessment of the aid character of the contested measures. (2) not providing sufficient reasons for finding that the contested measures fulfil all elements of State aid, especially why they should be regarded as selective. (3) prematurely opening a formal investigation and providing insufficient reasoning for the existence of State aid where there were no difficulties to continue the preliminary investigation. Judgement of the Court On 14 July 2021 The General Court dismissed the claims brought by Nike. The Court agreed that the intercompany royalties payments as determined in the tax rulings (unilateral APA’s) issued by the Netherlands left the distribution affiliates with less profits than would have occurred at arm’s length ...

Engie (former GDF Suez) is a French electric utility company. Engie Treasury Management S.à.r.l., a treasury company, and Engie LNG Supply, S.A, a liquefied natural gas trading company, are both part of the Engie group. In November 2017, Total has signed an agreement with Engie to acquire its LNG business, including Engie LNG Supply. In 2018 the European Commission has found that Luxembourg allowed two Engie group companies to avoid paying taxes on almost all their profits for about a decade. This is illegal under EU State aid rules because it gives Engie an undue advantage. Luxembourg must now recover about €120 million in unpaid tax. The Commission’s State aid investigation concluded that the Luxembourg tax rulings gave Engie a significant competitive advantage in Luxembourg. It does not call into question the general tax regime of Luxembourg. In particular, the Commission found that the tax rulings endorsed an inconsistent tax treatment of the same structure leading to non-taxation at all levels. Engie LNG Supply and Engie Treasury Management each significantly reduce their taxable profits in Luxembourg by deducting expenses similar to interest payments for a loan. At the same time, Engie LNG Holding and C.E.F. avoid paying any tax because Luxembourg tax rules exempt income from equity investments from taxation. This is a more favourable treatment than under the standard Luxembourg tax rules, which exempt from taxation income received by a shareholder from its subsidiary, provided that income is in general taxed at the level of the subsidiary. On this basis, the Commission concluded that the tax rulings issued by Luxembourg gave a selective advantage to the Engie group which could not be justified. Therefore, the Commission decision found that Luxembourg’s tax treatment of Engie endorsed by the tax rulings is illegal under EU State aid rules. The decision was appealed to the European General Court by Luxembourg and Engie. Judgement of the Court The General Court decided in favour of the Commission and held that a set of tax rulings issued by Luxembourg artificially reduced Engie’s tax bill by around €120 million. The tax rulings endorsed two financing structures put in place by Engie that treated the same transaction both as debt and as equity, with the result that its profits remained untaxed. The General Court has also confirmed that State aid enforcement can be a tool to tackle abusive tax planning structures that deviate from the objectives of the general tax system. See the Press Release of the Court Click here for Unofficial English Translation Click here for other translation ...

On 3 September 2012, the Luxembourg tax authorities issued a tax ruling in favour of Fiat Chrysler Finance Europe (‘FFT’), an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe. The tax ruling at issue endorsed a method for determining FFT’s remuneration for these services, which enabled FFT to determine its taxable profit on a yearly basis for corporate income tax in the Grand Duchy of Luxembourg. In 2015, the Commission concluded that the tax ruling constituted State aid under Article 107 TFEU and that it was operating aid that was incompatible with the internal market. It also noted that the Grand Duchy of Luxembourg had not notified it of the proposed tax ruling and had not complied with the standstill obligation. The Commission found that the Grand Duchy of Luxembourg was required to recover the unlawful and incompatible aid from FFT. The Grand Duchy of Luxembourg and FFT each brought an action before the General Court for annulment of the Commission’s decision. They criticise the Commission in particular for: (1) having adopted an analysis leading to tax harmonisation in disguise; (2) having found that the tax ruling at issue conferred an advantage, notably on the ground that it did not comply with the arm’s length principle, contrary to Article 107 TFEU and to the obligation to state reasons and in breach of the principles of legal certainty and protection of legitimate expectations; (3) having found that that advantage was selective, contrary to Article 107 TFEU; (4) having found that the measure at issued restricted competition and distorted trade between Member States, contrary to Article 107 TFEU and to the obligation to state reasons; and (5) having breached the principle of legal certainty and infringed the rights of the defence, by ordering that the aid at issue be recovered. In it’s judgment, the General Court dismisses the actions and confirms the validity of the Commission’s decision. In the first place, with regard to the plea relating to tax harmonisation in disguise, the Court notes that, when considering whether the tax ruling at issue complied with the rules on State aid, the commission did not engage in any ‘tax harmonisation’ but exercised the power conferred on it by EU law by verifying whether that tax ruling conferred on its beneficiary an advantage as compared to ‘normal’ taxation, as defined by national tax law. In the second place, as regards the pleas relating to the absence of an advantage, the Court first considered whether, for a finding of an advantage, the Commission was entitled to analyse the tax ruling at issue in the light of the arm’s length principle as described by the Commission in the contested decision. In that regard, the Court notes in particular that, in the case of tax measures, the very existence of an advantage may be established only when compared with ‘normal’ taxation and 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 position in the absence of the measure at issue and under the normal rules of taxation. The Court goes on to note that the pricing of intra-group transactions is not determined under market conditions. It states that, where national tax law does not make a distinction between integrated undertakings and stand-alone undertakings for the purposes of their liability to corporate income tax, 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. The Court holds that, in those circumstances, when examining, pursuant to the power conferred on it by Article 107(1) TFEU, a fiscal measure granted to such an integrated undertaking, the Commission may compare the fiscal burden of such an integrated undertaking resulting from the application of that fiscal measure with the fiscal burden resulting from the application of the normal rules of taxation under the national law of an undertaking placed in a comparable factual situation, carrying on its activities under market conditions. The Court makes clear that the arm’s length principle as described by the Commission in the contested decision is a tool that allows the Commission to check that intra-group transactions are remunerated as if they had been negotiated between independent companies. Thus, in the light of Luxembourg tax law, that tool falls within the exercise of the Commission’s powers under Article 107 TFEU. The Commission was therefore, in the present case, in a position to verify whether the pricing for intra-group transactions endorsed by the tax ruling at issue corresponds to prices that would have been negotiated under market conditions. The Court further notes that it does not follow from the contested decision that the Commission found that every tax ruling necessarily constitutes State aid. Second, with regard to demonstrating the actual existence of an advantage, the Court examined whether the Commission was right to find that the methodology for calculating FFT’s remuneration, as endorsed by the tax ruling at issue, did not enable an arm’s length remuneration to be obtained and whether this resulted in a reduction of FFT’s taxable profit. In that regard, the Court concludes that the Commission correctly found that the arrangements for the application of the transactional net margin method (TNMM) endorsed by the tax ruling at issue were incorrect and, specifically, that the whole of FFT’s capital should have been taken into account and a single rate should have been applied. In any event, the Commission also correctly considered that the method consisting, on the one hand, in using FFT’s hypothetical regulatory capital and, on the other, in excluding FFT’s shareholdings in Fiat Finance North America (FFNA) and Fiat Finance Canada (FFC) from the amount of the capital to be remunerated could not result in an arm’s length outcome. Consequently, the Court finds that the methodology approved by the tax ruling ...

The European Commission has now opened an in-depth investigation to examine whether tax rulings granted by Luxembourg to Finnish food and drink packaging company Huhtamäki may have given the company an unfair advantage over its competitors, in breach of EU State Aid rules. Margrethe Vestager, Commissioner in charge of competition policy, said: “Member States should not allow companies to set up arrangements that unduly reduce their taxable profits and give them an unfair advantage over their competitors. The Commission will carefully investigate Huhtamäki’s tax treatment in Luxembourg to assess whether it is in line with EU State aid rules.” The Commission’s formal investigation concerns three tax rulings issued by Luxembourg to the Luxembourg-based company Huhtalux S.à.r.l. in 2009, 2012 and 2013. The 2009 tax ruling was disclosed as part of the “Luxleaks” investigation led by the International Consortium of Investigative Journalists in 2014. Huhtalux is part of the Huhtamäki group, which is headquartered in Finland. Huhtamäki is a company active in consumer packaging, notably in food and food service packaging in Europe, Asia and Australia. Huhtalux carries out intra-group financing activities. It receives interest-free loans from another company of the Huhtamäki group based in Ireland. These funds are then used by Huhtalux to finance other Huhtamäki group companies through interest-bearing loans. The three tax rulings issued by Luxembourg allow Huhtalux to unilaterally deductfrom its taxable base fictitious interest payments for the interest-free loans it receives. According to Luxembourg, these fictitious expenses correspond to interest payments that an independent third party in the market would have demanded for the loans that Huhtalux receives. However, Huhtalux does not pay any such interest. These deductions reduce Huhtalux’s taxable base and, as a result, the company is taxed on a substantially smaller profit. The Commission is concerned that Luxembourg has accepted a unilateral downward adjustment of Huhtalux’s taxable base that may grant the company a selective advantage. This is because it would allow the group to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms. If confirmed, this would amount to illegal State aid ...

In 2016, the Commission requested that Belgium reclaim around €700 million from multinational corporations in what the Commission found to be illegal state aid provided under the Belgian “excess profit” tax scheme. The tax scheme allowed selected multinational corporations to exempt “excess profits” from the tax base when calculating corporate tax in Belgium. The European Court of Justice concludes that the Commission erroneously considered that the Belgian excess profit system constituted an aid scheme and orders that decision must be annulled in its entirety, in as much as it is based on the erroneous conclusion concerning the existence of such a scheme. For state aid to constitute an ‘aid scheme’, it must be awarded without requiring “further implementing measures.” According to court, “the Belgian tax authorities had a margin of discretion over all of the essential elements of the exemption system in question.” Belgium could influence the amount and the conditions under which the exemption was granted, which precludes the existence of an aid scheme. For an aid scheme to exist EU regulation also requires, beneficiaries are defined “in a general and abstract manner” and the aid is awarded for an infinite period of time. This was not the case in the Belgian “excess profit” tax scheme. Click here for translation ...

In January 2016 the European Commission concluded that Belgium’s excess profits tax exemption scheme was incompatible with the internal market and unlawful and ordering recovery of the aid granted . Belgium’s excess profits tax exemption In the first step, the arm’s length prices charged in transactions between the Belgian entity of a group and the companies with which it is associated were fixed based on a transfer pricing report provided by the taxpayer. Those transfer prices were determined by applying the transactional net margin method (TNMM). A residual or arm’s length profit was thus established, which corresponded to the profit actually recorded by the Belgian entity. In the second step the Belgian entity’s adjusted arm’s length profit was established by determining the profit that a comparable standalone company would have made in comparable circumstances. The difference between the profit arrived at following the first and second steps (namely the residual profit minus the adjusted arm’s length profit) constituted the amount of excess profit which the Belgian tax authorities regarded as being the result of synergies or economies of scale arising from membership of a corporate group and which, accordingly, could not be attributed to the Belgian entity. Under the scheme at issue, that excess profit was not taxed. According to the Commission, that non-taxation granted the beneficiaries of the scheme a selective advantage, particularly since the methodology for determining the excess profit departed from a methodology that leads to a reliable approximation of a market-based outcome and thus from the arm’s length principle. The Commission considered that the measure in question constituted an aid scheme, based on Article 185(2)(b) of the CIR 92, as applied by the Belgian tax administration. According to the Commission, those acts constitute the basis on which the exemptions in question were granted. In addition, the Commission considered that those exemptions were granted without further implementing measures being required, since the advance rulings were merely technical applications of the scheme at issue. Furthermore, the Commission stated that the beneficiaries of the exemptions were defined in a general and abstract manner by the acts on which the scheme was based. Those acts referred to entities that form part of a multinational group of companies. Belgium appealed the decision to the European General Court. The Judgement of the General Court The General Court annulled the Commission’s decision. “Conclusion on the classification of the measures in question as an aid scheme 135   It follows from the foregoing considerations that the Commission erroneously considered that the Belgian excess profit system at issue, as presented in the contested decision, constituted an aid scheme. 136    Accordingly, it is necessary to uphold the pleas raised by the Kingdom of Belgium and Magnetrol International, alleging the infringement of Article 1(d) of Regulation 2015/1589, as regards the conclusion set out in the contested decision regarding the existence of an aid scheme. Consequently, without it being necessary to examine the other pleas raised against the contested decision, that decision must be annulled in its entirety, inasmuch as it is based on the erroneous conclusion concerning the existence of such a scheme.” ...

The European Commission has opened an in-depth investigation to examine whether tax rulings granted by the Netherlands to Nike may have given the company an unfair advantage over its competitors, in breach of EU State aid rules. Margrethe Vestager, Commissioner in charge of competition policy, said: “Member States should not allow companies to set up complex structures that unduly reduce their taxable profits and give them an unfair advantage over competitors. The Commission will investigate carefully the tax treatment of Nike in the Netherlands, to assess whether it is in line with EU State aid rules. At the same time, I welcome the actions taken by the Netherlands to reform their corporate taxation rules and to help ensure that companies will operate on a level playing field in the EU.” Nike is a US based company involved worldwide in the design, marketing and manufacturing of footwear, clothing, equipment and accessories, in particular in the sports area. The formal investigation concerns the tax treatment in the Netherlands of two Nike group companies based in the Netherlands, Nike European Operations Netherlands BV and Converse Netherlands BV. These two operating companies develop, market and record the sales of Nike and Converse products in Europe, the Middle East and Africa (the EMEA region). Nike European Operations Netherlands BV and Converse Netherlands BV obtained licenses to use intellectual property rights relating to, respectively, Nike and Converse products in the EMEA region. The two companies obtained the licenses, in return for a tax-deductible royalty payment, from two Nike group entities, which are currently Dutch entities that are “transparent” for tax purposes (i.e., not taxable in the Netherlands).The Nike group’s corporate structure itself is outside the remit of EU State aid rules. From 2006 to 2015, the Dutch tax authorities issued five tax rulings, two of which are still in force, endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property. As a result of the rulings, Nike European Operations Netherlands BV and Converse Netherlands BV are only taxed in the Netherlands on a limited operating margin based on sales. At this stage, the Commission is concerned that the royalty payments endorsed by the rulings may not reflect economic reality. They appear to be higher than what independent companies negotiating on market terms would have agreed between themselves in accordance with the arm’s length principle. In particular, a preliminary analysis of the companies’ activities found that: Nike European Operations Netherlands BV and Converse Netherlands BV have more than 1,000 employees and are involved in the development, management and exploitation of the intellectual property. For example, Nike European Operations Netherlands BV actively advertises and promotes Nike products in the EMEA region, and bears its own costs for the associated marketing and sales activities. In contrast, the recipients of the royalty are Nike group entities that have no employees and do not carry out any economic activity. The Commission investigation will focus on whether the Netherlands’ tax rulings endorsing these royalty payments may have unduly reduced the taxable base in the Netherlands of Nike European Operations Netherlands BV and Converse Netherlands BV since 2006. As a result, the Netherlands may have granted a selective advantage to the Nike group by allowing it to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms. If confirmed, this would amount to illegal State aid ...

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 ...

The European Commission has opened an in-depth investigation into Luxembourg’s tax treatment of the GDF Suez group (now Engie). The Commission has concerns that several tax rulings issued by Luxembourg may have given GDF Suez an unfair advantage over other companies, in breach of EU state aid rules. The Commission will assess in particular whether Luxembourg tax authorities selectively derogated from provisions of national tax law in tax rulings issued to GDF Suez. They appear to treat the same financial transaction between companies of GDF Suez in an inconsistent way, both as debt and as equity. The Commission considers at this stage that the treatment endorsed in the tax rulings resulted in tax benefits in favour of GDF Suez, which are not available to other companies subject to the same national taxation rules in Luxembourg. As from September 2008, Luxembourg issued several tax rulings concerning the tax treatment of two similar financial transactions between four companies of the GDF Suez group, all based in Luxembourg. These financial transactions are loans that can be converted into equity and bear zero interest for the lender. One convertible loan was granted in 2009 by LNG Luxembourg (lender) to GDF Suez LNG Supply (borrower); the other in 2011 by Electrabel Invest Luxembourg (lender) to GDF Suez Treasury Management (borrower). The Commission considers at this stage that in the tax rulings the two financial transactions are treated both as debt and as equity. This is an inconsistent tax treatment of the same transaction. On the one hand, the borrowers can make provisions for interest payments to the lenders (transactions treated as loan). On the other hand, the lenders’ income is considered to be equity remuneration similar to a dividend from the borrowers (transactions treated as equity). The tax treatment appears to give rise to double non-taxation for both lenders and borrowers on profits arising in Luxembourg. This is because the borrowers can significantly reduce their taxable profits in Luxembourg by deducting the (provisioned) interest payments of the transaction as expenses. At the same time, the lenders avoid paying any tax on the profits the transactions generate for them, because Luxembourg tax rules exempt income from equity investments from taxation. The final result seems to be that a significant proportion of the profits recorded by GDF Suez in Luxembourg through the two arrangements are not taxed at all. The two arrangements between LNG Luxembourg (lender) and GDF Suez LNG Supply (borrower) as well as Electrabel Invest Luxembourg (lender) and GDF Suez Treasury Management (borrower) work as follows: Under the terms of the convertible zero interest loan the borrower would record in its accounts a provision for interest payments, without actually paying any interest to the lender. Interest payments are tax deductible expenses in Luxembourg. The provisioned amounts represent a large proportion of the profit of each borrower. This significantly reduces the taxes the borrower pays in Luxembourg. Had the lender received interest income, it would have been subject to corporate tax in Luxembourg. Instead, the loans are subsequently converted into company shares in favour of the lender. The shares incorporate the value of the provisioned interest payments and thereby generate a profit for the lenders. However, this profit – which was deducted by the borrower as interest – is not taxed as profit at the level of the lender, because it is considered to be a dividend-like payment, associated with equity investments ...