On October 21, 2015, the European Commission issued two important state aid decisions concerning the tax rulings applicable to, respectively, Starbucks Manufacturing in the Netherlands and Fiat Finance and Trade in Luxembourg. Although the full versions of the decisions are not yet available, the Commission’s press releases confirm that, in both cases, the tax rulings were considered to constitute unlawful state aid.
Context. The Commission has been investigating national tax ruling practices in the EU since June 2013. The investigations initially focused on Belgium, Cyprus, Ireland, Luxembourg, Malta, the Netherlands and the United Kingdom, but were subsequently extended to all Member States. In-depth investigations were opened in relation to Ireland (Apple), the Netherlands (Starbucks), Luxembourg (Fiat Finance and Trade, Amazon) and Belgium (the Belgian excess profits ruling system). The October 21 decisions conclude two of the formal investigations (Starbucks and Fiat Finance and Trade); the other investigations look set to continue.
From tax rulings to state aid. The Commission points out in its press releases that tax rulings (i.e., comfort letters whereby tax authorities provide companies with legal certainty regarding the calculation of their corporate tax or the interpretation of special tax provisions) as such “are perfectly legal.”However, the Commission also explains that tax rulings may be found to constitute state aid for purposes of EU competition law if they grant the companies concerned a “selective advantage” to the detriment of their competitors, for example if they endorse transfer prices within a group of companies that have no economic justification.
Key elements of the cases. In both the Starbucks and Fiat Finance and Trade cases, the Commission took the view that the methods endorsed by the tax authorities to establish the companies’ taxable profits did not reflect economic reality and amounted to a selective advantage.
- In relation to Fiat Finance and Trade (based in Luxembourg), the Commission was of the view that, had certain capital treatments which were endorsed in a Luxembourg tax ruling reflected market conditions, the taxable profits declared in Luxembourg by Fiat Finance and Trade would have been 20 times higher than the taxable profits that were actually declared.
- In relation to Starbucks Manufacturing (based in the Netherlands), the Commission was of the view that intra-group transfer pricing arrangements and intra-group royalty payments served artificially to lower the taxes to be paid by Starbucks Manufacturing in the Netherlands.
What’s next? Although the Commission emphasizes that “[e]ach of [the tax ruling] cases is assessed on its merits and [the October 21] decisions do not prejudge the outcome of the Commission's ongoing probes,” the strong language elsewhere in the press releases and in statements by Commissioner Vestager suggests that the Commission might be looking to move forward with some of its other cases regarding tax rulings. However, there are important differences among the various ongoing cases, which means that these first two decisions cannot be relied upon as a direct precedent. For example, the Commission’s investigation of the Belgian measure focuses on an entire tax scheme, as opposed to an individual tax ruling. The wider scope of the measure at issue in the Belgian case may make it more difficult for the Commission to demonstrate the necessary “selectivity” than in the cases regarding individual tax rulings. In addition, the possibility remains that yesterday’s decisions could be annulled on appeal; indeed, Starbucks has already publicly pledged to lodge such an appeal with the EU’s General Court.
This is likely just the beginning of a long saga in which key legal issues will be tested in court, including whether or not the Commission has used an appropriate benchmark to establish a selective advantage for the aid recipient in question (necessary criterion for a finding of state aid), and whether it was appropriate to order recovery in cases that arguably present a novel approach to the application of state aid law to tax rulings.
Unfortunately, these decisions have created significant legal uncertainty for multinational companies that have relied on tax rulings in Europe. The enforcement landscape is further complicated by the fact that national courts also have the power to enforce the obligation on Member States to notify state aid measures to the Commission.
New investigative tools. The October 21 decisions represent the Commission’s first use of its new information request tools under Council Regulation (EU) No 734/2013, part of the state aid modernization package. This Regulation enables the Commission, in cases where the information provided by a Member State under investigation is not sufficient, to ask any other Member State or a company (including the beneficiary of the alleged aid) to directly provide all market information necessary to enable it to complete its state aid assessment. The Commission made use of these new investigative tools to overcome the reticence of certain Member States to provide the requested information under the formal procedure.
Conclusions. These first decisions do not necessarily call into question all tax rulings in relation to capital treatment or transfer pricing in the EU, but they do confirm that the Commission is prepared to closely scrutinize such rulings. With the Commission increasingly conscious of public perceptions of its enforcement work, it seems likely that it will look to progress other (or bring new) tax ruling-related state aid cases, potentially involving significantly higher amounts of recovery.