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Nike tax rulings subject to state aid investigation

Out-Law News | 14 Jan 2019 | 11:48 am | 2 min. read

Tax rulings in the Netherlands are being scrutinised by the European Commission in an investigation into whether sports goods manufacturer Nike has benefited from illegal state aid.

The five rulings, issued between 2006 and 2015, endorsed royalty payments that were exchanged between companies in the Nike group in the Netherlands in relation to rights to licence Nike and Converse products in Europe, the Middle East and Africa.

The Commission said the royalty payments, backed by the Dutch tax authorities, "appear to be higher than what independent companies negotiating on market terms would have agreed between themselves" and has raised concern about the impact the rulings have had on the way Nike is taxed in the Netherlands and with whether it has given Nike an unfair advantage over competitors.

"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," the Commission said. "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."

The Netherlands has recently taken steps to tightening the requirements for tax rulings concerning international structures, according to the Commission.

Margrethe Vestager, EU competition commissioner, 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."

Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-Law.com, said: "This investigation has some similarities with the Starbucks case. It involves the Netherlands again, and also looks to be a challenge to the way that country has applied the arm’s length test in the OECD transfer pricing rules. The Starbucks decision was particularly controversial because it appeared that a proper transfer pricing study had been prepared and the Commission seemed to be interfering in a technical decision taken by a sovereign state. It is not clear whether the same applies in the Nike case."

"The Commission seems particularly keen to raise state aid in cases where profits seem to be escaping tax anywhere in the EU. In the Nike case it seems that the royalties have been paid to a structure which is tax transparent and so not taxable in the Netherlands. It should be remembered that in the recent tax state aid case  involving McDonalds and Luxembourg the Commission decided that no unlawful state aid had been given, even though the effect was that profits escaped being taxed anywhere, as Luxembourg was simply applying the terms of  a double tax treaty," she said.

"The Netherlands plans to introduce a withholding tax where royalties are paid to a company in a tax haven. The UK is also trying to get a share of the tax take where large royalties are paid offshore. However, its measures to tax offshore intangibles go even further and will tax payments made from one non-UK resident entity to another non-UK resident entity holding intangibles to the extent that they are used to generate UK sales," Robins said.