24/05/2021
In its decision regarding Amazon, the General Court concludes that “none of the findings set out by the Commission in the contested decision are sufficient to demonstrate the existence of an advantage for the purposes of Article 107(1) TFEU, with the result that the contested decision must be annulled in its entirety”. This decision is important because it calls into question the Commission’s established approach to state aid investigations involving transfer pricing.
In its decision in respect of Engie, the General Court concludes that “the General Court approves the Commission’s approach, when presented with a complex intra-group financing structure, which entails looking at the economic and fiscal reality, rather than a formalistic approach that takes in isolation each of the transactions under the structure”.
This decision is important because it allows the EC to find that there is state aid from the effect of a set of transactions rather than by considering each transaction separately.
The Amazon Decision
The Amazon case relates to the 2017 decision of the EC that the Amazon group had benefited from state aid through a Luxembourg tax ruling. The Commission’s decision in this case was that a Luxembourg company, Amazon Europe Holding Technologies SCS (LuxSCS), had entered into an intellectual property (IP) buy-in agreement and a cost sharing agreement with two US Amazon companies, as a result of which it would function as the IP holding company for Amazon’s European operations in return for royalty payments. In turn, it would license its IP rights on a back-to-back basis to its subsidiary Amazon EU Sarl (LuxOpCo), which would be the European headquarters, the strategic decision-maker and the principal operator of the European business.
Amazon set the royalty paid by LuxOpCo so as to leave it a net mark-up on costs of 4-6%, subject to this not being less than 0.45% and not more than 0.55% of EU revenue.
The EC investigated Luxembourg’s tax ruling because it had the following concerns:
- the ruling was made before seeing any transfer pricing analysis;
- it was not based on a recognized transfer pricing method;
- the royalty was not related to output, sales or profit;
- the ruling was allowed to continue for more than ten years;
- the mark-up on costs allowed for LuxOpCo was too low for its functions and risks; and
- there was no explanation for the floor and cap mechanism.
Having completed its investigation, the EC concluded that there was indeed state aid, for the following more detailed reasons:
- it was LuxOpCo rather than Lux SCS which performed the key functions and bore the key risks for both the IP and the European operations; and
- the transfer pricing method was wrong in the following ways:
- LuxSCS’s mere legal ownership of the IP was not ‘a unique contribution’
- LuxSCS should have been the tested party using the transactional net margin method (TNMM), and
- LuxSCS should have received a 5% mark-up on costs for its low value services.
The General Court’s decision was made on the basis of the following assessment:
- the Court accepted that, where not elsewhere specified, national law can be assumed to include the arm’s length standard;
- however, the EC must demonstrate that the taxable profit of the company would have been higher following the arm’s length principle;
- in this case the EC did not take into account the functions and risks of the company and was wrong to characterize the company as a mere passive holder of the intangible assets in question;
- the EC did not demonstrate that it would be easier to find comparables, or that comparables would be more robust, for LuxSCS rather than for LuxOpCo;
- the EC was incorrect to assert that LuxSCS’s remuneration could be calculated on the basis of the mere passing on of the development costs borne in relation to the buy-in agreement and the cost sharing agreement without taking into account the subsequent increase in value of those intangible assets;
- the EC erred in treating LuxSCS’s functions as low value-adding services;
- also, the EC failed to establish that the methodological errors necessarily led to an undervaluation of LuxOpCo’s remuneration;
- even if the tax ruling was on the basis of an inappropriate profit level indicator and should not have included the ceiling mechanism, the EC did not provide sufficient evidence to justify its inferences; and
- therefore, the elements put forward by the EC were not capable of establishing that LuxOpCo’s tax burden was artificially reduced.
The appeals can be found here and here.
The press release on the General Court’s decision can be found here.
The decision of the General Court can be found here.
The Engie Decision
The Engie case relates to the 2018 decision of the EC that the Engie group had benefited from state aid through two sets of Luxembourg tax rulings.
Starting in September 2008, Luxembourg issued several tax rulings concerning the tax treatment of two similar financial transactions between four Luxembourg companies of the GDF Suez group (now Engie). These financial transactions were loans that could be converted into equity. The loans had zero coupons but the borrowers could record a provision for interest payments.
The loans were then converted into shares in the borrowing companies in a way which captured the interest income for the lender.
The EC investigated Luxembourg’s tax ruling because it was concerned that the tax rulings appeared to treat the same income in an inconsistent manner, both as debt and as equity. Having completed its investigation, the EC concluded that there was indeed state aid, because the tax rulings gave 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 (which it was not in this case).
The General Court’s decision was made on the basis of the following assessment:
- there was no “tax harmonization in disguise” because the EC simply compared the tax outcome with that which would have been expected under the normal Luxembourg tax law;
- the finding of a reduction in the amount of tax demonstrates both an advantage and selectivity;
- the EC was entitled to identify the commercial reality of the series of transactions because they were designed to be implemented in successive but interdependent stages;
- there was therefore a selective advantage because the participation exemption statute relied on by the appellants had in this case to be interpreted based on the taxation of the income of the subsidiaries;
- no companies had been identified which would be refused identical tax treatment for an identical financing structure.
The appeals can be found at here and here.
The press release on the General Court’s decision can be found here.
The decision itself can be found (only in French) here.
The Commission has the right to appeal both decisions to the Court of Justice of the European Union (on points of law only) within two months and ten days.
Implications of the Decisions for Multinational Companies
In its decision on Amazon, the General Court has set a high bar for proving a selective advantage: it is not enough to demonstrate that a transfer pricing method is not the most appropriate, the alternative must also be specified and it must be shown that it can be benchmarked robustly and the necessary calculations must be presented. In specifying the alternative transfer pricing method the EC should base it on an accurate functional analysis which does not selectively ignore facts.
The Engie decision indicates that for all multinational companies who have benefited from formal or informal agreements, tax rulings or APAs in the EU, they may no longer be able to rely on the adherence with local tax law of single transactions to protect them from a successful state aid challenge, if those transactions are parts of a structure designed to achieve a single overall objective.
