On 14 November 2014, the European Commission ("Commission") published its preliminary decision of 11 June 2014 by deciding that a particular Dutch tax ruling agreed with Starbucks Manufacturing B.V. ("Starbucks") constitutes state aid and requires a more in-depth investigation. The scrutiny of the Dutch tax ruling with Starbucks does not come as a novelty as the Commission's radar on state aid measures has already red flagged tax rulings with Apple Inc. in Ireland and Amazon.com Inc. and Fiat SpA in Luxembourg. This begs the question of whether other tax rulings will follow, and more specifically, whether this entails that the threshold for state aid can be considered as easily met in relation to tax rulings.

State aid

Article 107 of the Treaty on the Functioning of the European Union ("TFEU") prohibits state aid considering that it can distort competition within the internal market of the European Union ("EU"). This can be realised where a specific EU undertaking receives government support and as such gains an advantage in relation to its competitors in the EU market.

The notion of state aid within the EU applies to any kind of support or aid granted by an EU Member State through e.g. its state resources or any other form. The following general state aid scheme may be of practical use in view of establishing whether or not state aid is triggered:

Click here to view flowchart.

Any support or aid that leads to an advantage and is being conferred on a selective basis can constitute state aid. An advantage will be gained where, as a result of aid, the involved EU undertaking's net financial position improves or, even if there is no such improvement in its financial position, where, without the aid, the EU undertakings' position would have deteriorated. As indicated, we emphasize that such an advantage can take various forms such as grants, guarantees, preferential terms, but also interest and tax reliefs.

We do note, however, that a given advantage is not automatically considered to have a selective character and therefore constitute a selective advantage within the meaning of the EU state aid rules. Whether there is a selective advantage must be determined by comparison to the general system applicable to EU undertakings in the same EU Member State.

In that regard, the General Court of the European Union ("GCEU") has recently annulled a Commission's decision declaring Spanish tax benefits to be illegal state aid. According to the GCEU judgment, the Commission failed to establish the state aid element of a "selective basis". This judgment goes to show that the "selective character" of an advantage is not easily satisfied.

Consequences of illegal state aid

Once it is established that state aid has been granted and as such is not compatible with the EU internal market, the involved EU Member State will be obliged (by the Commission) to recover the given state aid with interest. In that regard, a limitation period of ten years applies instead of the national five year period. Moreover, we note that EU undertakings can generally not rely on the principle of protection of legitimate expectations as generally no legitimate expectations arise until a decision approving the state aid has been taken.

Dutch tax ruling system

Considering the above in view of Commission's decision in the Starbucks case, the Commission does take the preliminary view that the agreed Dutch tax ruling is to be considered as a selectiveadvantage and to be regarded as state aid. The Commission does, however, have doubts about the compatibility of the established state aid with the EU internal market and therefore requires a more in-depth investigation.

The Dutch State Secretary of Finance has recently replied in writing to Commission's decision by stating that the tax ruling is not to be regarded as state aid because it does not constitute a selective advantage considering that the tax ruling is in accordance with the internationally applicable OECD guidelines and Dutch tax legislation.

We do note that it is unlikely that the whole Dutch tax ruling system is incompatible with main Article 107 TFEU as the Commission notes that the Netherlands "seem to generally proceed with a thorough assessment based on comprehensive information required from the tax payer" and therefore can most likely rule out finding any systematic irregularities in Dutch tax ruling practice.

Our view and recommendation

Taking into account that the new EU antitrust chief Ms. Vestager said that tax investigations are her top priority, it is very likely that the Commission is already investigating any tax incentives that may fall within the notion of state aid. Although the threshold of a "selective character" is not automatically and easily met, we do recommend to (re-)assess any agreed tax rulings or incentives in relation to possible EU state aid coverage.