During the past year, the European Commission (EC) has significantly broadened the reach of its investigations into whether particular taxation arrangements constitute prohibited “state aid.”  To the extent the tax arrangement with a company constitutes prohibited state aid, the government involved may be required by the EC to claw back (“recover”) that portion of the tax benefit from the company.  Prior to this year, the EC’s state aid investigations have been limited and largely confined to tax measures enacted into law.  This year’s dramatic changes have been to expand the number of state aid tax investigations and to move beyond enacted law to investigate the administrative ruling process.  These actions throw into doubt hundreds of existing rulings on which multinational enterprises have relied and threaten the scope of future tax ruling programs within the European Union.  Under fire are the transfer pricing ruling programs in Ireland, Luxembourg, The Netherlands and Gibraltar.  In addition, the EC is examining Luxembourg’s IP tax regime and the United Kingdom’s “patent box” arrangements. 

What Should You Expect? 

Rather than slowly chipping away at this problem over the next five years, it is likely that the EC will focus resources on selected high-profile investigations to send a strong signal not only to the Member States but also to multinational businesses that have benefitted from preferential arrangements.  As this first wave of investigations continues, national authorities (both in investigated Member States and other Member States) are expected to begin reviewing existing tax rulings and preferential tax regimes to assess their vulnerability to a claim of prohibited state aid.   

What If Your Company’s Ruling Comes under Scrutiny?

The EC’s state aid investigations formally engage the Member State rather than the beneficiaries of the tax arrangement in question.  However, beneficiaries (e.g. multinational entities with favorable tax rulings) have three avenues to address the EC’s action. 

  1. During the investigation phase, the Member State will most likely liaise and seek the active involvement of the tax ruling recipients to respond to the EC’s request for information and documents.  The advocacy starts at that stage, either through the formulation of responses to the EC’s requests or, more actively, through direct interaction with EC officials. 
  2. Tax ruling recipients are able to comment on and, in particular, to challenge the EC’s preliminary assessment.  (You will know of this preliminary assessment, along with the facts and legal basis for the decision, because it is included in the Commission’s published decision to open a proceeding about your ruling.) The beneficiaries and other interested third parties have one month from the date of publication to submit comments. 
  3. Tax ruling recipients may challenge the final decision before the EU General Court (GC) in Luxembourg. In that respect, they may challenge (i) the EC’s findings that the tax ruling constitutes illegal state aid; and/or (ii) the EC’s order requiring the Member State to “recover” the aid. 

What Legal Arguments Can Be Used to Challenge a Preliminary or Final EC Decision?

A taxation arrangement may constitute prohibited state aid if it provides a recipient with a benefit on a selective basis, as determined within a particular “system of reference” (e.g. the general corporate tax law).  There are two main paths of argument to challenge an EC decision (whether preliminary or final) that a tax ruling constitutes prohibited state aid. 

  1. The tax recipient may challenge the “system of reference” as adopted by the EC in such a way as to show that the tax ruling at issue does not depart from generally admitted rules.
  2. The tax recipient may demonstrate why the tax ruling program is not selective.  The heart of this approach is to show that the company did not receive an unfair advantage over other companies through the administrative ruling process. 

These arguments must be constructed from a solid mix of international tax and EU state aid knowledge, arguing by analogy from case law relevant to enacted tax laws to the present ruling process investigations. 

What Legal Arguments Can Be Used to Challenge Recovery? 

If the EC issues a negative decision and the aid has already been paid out (i.e., the prohibited tax benefit already claimed), the EC customarily orders the Member State to recover the aid – with interest, although there is a ten-year statute of limitations for recovery.  There may be instances where recovery would be contrary to general principles of EU law.  The principles most often invoked in this context are the principles of: (i) protection of legitimate expectations; and (ii) legal certainty.  The recovery process moves quickly.  Here the taxpayer should gather all its proof that it believed the aid in question was lawful and that it relied on that aid.  The reliance argument has perhaps the best potential to prompt the GC to refuse recovery for rulings already in place. 


While, throughout the EC’s investigation, tax ruling recipients are not strictly speaking party to the proceedings, they clearly have a lot on the line.  It is thus imperative for a tax ruling recipient that finds itself in such a position to: (i) submit meaningful, persuasive advocacy when given the opportunity to do so; (ii) pro-actively engage the Member State(s) concerned.  Taxpayers that do not have rulings that are the subject of proceedings should also consider the impact of these developments on any rulings they do have, on any rulings they are contemplating, on their audit positions in country, and on the undertakings they may be providing in transactions.