On 4 October 2017, after a long investigation, the European Commission held that a tax ruling between Amazon and Luxembourg constituted illegal State aid [see our November 2015 Newsletter]. The Commission ordered Luxembourg to recover this aid from Amazon, which is estimated to be around EUR 250 million.

The Commission explained that the tax ruling in question allowed Amazon to pay substantially less tax than other companies. More specifically, the Commission stated that the tax ruling enabled Amazon to shift the vast majority of its profits from an Amazon group company (Amazon EU) to another company (Amazon Europe Holding Technologies). Amazon EU is subject to taxation in Luxembourg while Amazon Europe Holding Technologies is not. As a limited partnership, only the partners of Amazon Europe Holding Technologies are subject to taxation. These partners are located in the US and have so far deferred their tax liability.

Amazon EU operates Amazon's retail business in Europe. Amazon Europe Holding Technologies does not have any employees or offices, nor does it carry out any business activities. The holding company is an intermediary between Amazon EU and Amazon in the US. It has intellectual property rights and grants its exclusive use of these rights to Amazon EU. Under the tax ruling, Amazon EU paid royalties to Amazon Europe Holding Technologies, as a result of which Amazon EU's taxable profits were substantially reduced.

The Commission decided that the royalty payments did not reflect the economic reality. According to the Commission, the holding company did not perform any activities to justify the level of the royalties received since it was not involved in the management, development or use of its intellectual property. The royalty payment was therefore contrary to the so-called "arm's length principle" under which payments between two companies in the same group should be in line with arrangements that take place under commercial conditions between independent businesses.

The non-confidential version of the decision has not been published yet. Therefore, the exact methodology used to calculate the illegal advantage enjoyed by Amazon is not fully known. The tax authorities in Luxembourg will use this method to determine the exact amount of the State aid that has to be recovered from Amazon.