This morning, the European Commission announced its long-awaited decision in investigations into whether tax rulings in favour of Fiat Finance and Trade (“FFT”) and Starbucks in Luxembourg and the Netherlands respectively, amounted to unlawful “State aid”. As anticipated, the Commission decided that the rulings conferred a “selective advantage” on FTT and Starbucks that is illegal under EU State aid rules. Both companies must now repay around €20 – 30 million in back taxes.

What are the State aid rules?

The State aid rules govern the circumstances in which government bodies can provide subsidies or assistance to businesses. A measure will amount to State aid if it is financed through State resources; confers an advantage on the recipient; is selective; and distorts or threatens to distort competition and has the potential to affect trade between Member States.

The Commission decided that the tax rulings in favour of FFT and Starbucks fulfilled all of these criteria.

What tax rules do the cases concern?

The Commission’s investigation focused on the prices charged for transactions between companies in each of FFT’s and Starbucks’ corporate groups (known as “transfer pricing” arrangements). Companies in the same corporate group are required to price their transactions as if they were unrelated entities transacting at “arms-length” in order to ensure that the transaction is taxed appropriately.

The Commission decided that the Luxembourg and Netherlands authorities issued rulings which allowed FTT and Starbucks to artificially reduce their tax bills by undervaluing taxable profit on intra-group transactions on the basis of a series of economically unjustifiable assumptions. The Commission assesses that the companies’ manipulation of their taxable profits has unduly reduced each of their tax burdens by €20 – €30 million.

In FFT’s case, the decision revolves around intra-group loans, the terms of which the Commission has claimed do not reflect market conditions and thereby substantially reduced FFT’s taxable profits.

In Starbucks’ case the decision relates to intra-group royalty payments for the use of intellectual property and the prices charged internally for coffee beans. What has the Commission ordered?

The Commission has ordered Luxembourg and the Netherlands to recover €20 – €30 million in unpaid tax from FTT and Starbucks respectively. The precise amounts are not yet known, as the Commission has at this stage only informed the companies of the methodology to apply.

What happens next?

It is generally expected that both the Luxembourgish and Dutch authorities, and the companies concerned, will appeal the Commission’s decision to the General Court of the EU. Starbucks has already announced its intention to do so.

What are the implications for other companies going forward?

If, as is very likely, the Commission decisions are appealed, court cases will be likely to take at least two years, meaning that it will be some time before there is a clear EU position on transfer pricing rulings.

However, in this morning’s Commission press conference, Margarethe Vestager, Commissioner for Competition, announced that the Commission intends to continue enquiries into tax ruling practices in all EU member states, as well as the ongoing investigations into tax rulings in Ireland and Luxembourg in respect of Apple and Amazon. The Commission can review rulings going back up to 10 years and can order the recovery of underpaid taxes, plus interest.

The Commission has stressed that tax rulings are in principle perfectly legal and that any further investigations will be assessed on their own merits. However, inevitably this morning’s decisions raise concerns for companies whose past rulings may now be open to fresh scrutiny. Consequently, directors may consider that further legal and strategic advice, independent of those responsible for obtaining the rulings, may be needed to satisfy unsettled shareholders and other stakeholders.