Out-Law News | 19 May 2021 | 3:31 pm | 4 min. read
Recent decisions by the EU General Court should be seen as confirmation of the core approach taken by the European Commission to tax rulings granted by member states to multinational companies, according to legal experts at Pinsent Masons, the law firm behind Out-Law.
Last week, the General Court annulled the European Commission’s 2017 decision that Luxembourg’s tax treatment of Amazon amounted to illegal state aid (4-page / 257KB PDF). It found in favour of the Commission in a second case, this time concerning Luxembourg’s tax treatment of Engie, in a separate decision handed down on the same day (2-page / 252KB PDF).
State aid expert Totis Kotsonis of Pinsent Masons, the law firm behind Out-Law, said: “Although losing the Amazon case is a blow to the Commission, this should not distract from the fact that the Commission has won – and continues to win – on the principles underlying its tax state aid investigations”.
“The court has already accepted – and repeated in these judgments – that the Commission’s state aid investigations do not constitute tax harmonisation through the back door and it is legitimate for the Commission to be investigating national tax rulings for compliance with EU state aid rules. The Commission had already also won the argument – again confirmed by these judgments – that national tax rulings should reflect economic and fiscal reality and that the ‘arm’s length’ principle is a legitimate tool in determining whether pricing arrangements between affiliate companies reflect market conditions,” he said.
Dr. Totis Kotsonis
Partner, Head of Subsidies, Procurement, Trade Agreements and Trade Remedies
The European Commission has won – and continues to win – on the principles underlying its tax state aid investigations
The European Commission does not have direct authority over national direct tax systems of EU member states. It can, however, investigate whether tax arrangements agreed between a member state and an individual company in the form of a tax ruling breach state aid laws, in that they grant an advantage to that company over others. A tax ruling which reduces a company’s tax burden can be seen to constitute an advantage if the same incentive was not available to others.
The Amazon decision concerns the tax treatment in Luxembourg of two Luxembourg incorporated entities in the Amazon group: an operating company, which operated Amazon’s retail business throughout Europe; and a holding company, which acted as an intermediary between the operating company and Amazon in the US and licensed Amazon’s European intellectual property rights to the retail business in exchange for a royalty payment. Amazon changed the way it operates in Europe in 2015 and no longer uses the corporate structure to which the tax ruling applied.
The General Court ruled that the Commission had been unable to prove to the requisite legal standard that there was an undue reduction of the tax burden on Amazon’s European operations as a result of the arrangements. The Commission had claimed that the royalty paid to the retail business to the holding company was too high, effectively artificially reducing the retail business’ profits and therefore its tax base. The court concluded that the Commission had failed to establish the existence of an advantage and did not adduce evidence capable of establishing that the Amazon's tax burden was artificially reduced.
Tax expert Catherine Robins of Pinsent Masons said: “This decision will be welcome news for multinational groups which have obtained transfer pricing rulings as a result of a robust transfer pricing analysis. It shows that it is not sufficient just for the Commission to disagree with the transfer pricing methodology used or pick holes in the way it is applied – to show there has been state aid, the Commission has the significant evidential burden of establishing that the methodology used has led to reduced taxation”.
However, in the Engie case, the General Court found that the business had received preferential tax treatment from the Luxembourg tax authorities, predominantly as the result of the non-application of a national measure relating to abuse of law. The transactions at issue were carried out in three stages, involved the use of intra-company interest-free mandatorily convertible loans and did not reflect the economic and fiscal reality, at which point the national abuse of law provisions should have kicked in.
Totis Kotsonis said: “In its decision, the General Court, among other things, accepts the Commission’s position that tax authorities should not disregard national provisions relating to abuse of law – which seek to combat abusive practices in tax matters – in the context of tax rulings; and that to do so, as happened here, amounts to granting a business a selective advantage which breaches EU state aid rules”.
“The Amazon judgment is clearly much more difficult for the Commission in that the court criticises extensively the Commission’s analysis and essentially concludes that it had failed to demonstrate that the holding company was merely an empty shell which added no value so that the royalties it received from the affiliate operating company were not justified. According to the court the Commission also failed to demonstrate that its alternative ‘arm’s length’ analysis was appropriate or had established that the tax paid by Amazon in Luxembourg was artificially reduced as a result of the tax ruling,” he said.
Despite press speculation that the Commission would appeal the result in the Amazon case, Kotsonis said this was unlikely, and its decision not to do so after the General Court’s decision in the Starbucks case in 2019 provided a relevant precedent for this
“Ultimately, the Amazon decision – as the Starbucks decision previously – does not challenge the Commission’s overall approach to investigating national tax rulings under state aid rules but instead the economic analysis which it undertook to demonstrating the existence of a selective advantage and, by implication, a breach of state aid rules,” he said.
“Given how extensive the court’s criticism of the Commission is, it would not be surprising if it decided to focus its resources on fighting other tax rulings cases, mindful of the need to be carrying out more thorough economic analyses, rather than pursue this further in the courts. Fundamentally, these appeals show that the Commission has been gaining acceptance of its core approach, whether it is the right to be investigating national tax rulings for compliance with state aid, the legitimacy of using the arm’s length principle as a tool for determining whether intra-group pricing arrangements reflect market conditions or, as in the Engie case, the principle that national tax authorities should not disregard national abuse of law provisions in the context of tax rulings,” he said.
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