EU Member States are prohibited from granting to companies selective advantages that qualify as State aid within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) without the prior approval of the European Commission (Commission). State aid can take many forms, and tax advantages are one of the most frequently used instruments.
The Commission has announced that it intends to use the EU State aid rules more intensively against aggressive tax planning by multinational companies.
On 11 June 2014, the Commission opened three formal investigations into alleged State aid given to Apple, Fiat Finance and Trade and Starbucks by Ireland, Luxembourg and the Netherlands respectively. These are the Commission’s first (but certainly not the last) concrete actions in this field, and are therefore of particular importance to all multinational companies and tax authorities in EU Member States.
Tax Rulings Can Have Character of Illegal State Aid
The opening of the formal investigations shows that the Commission has serious concerns that Apple, Fiat Finance and Trade and Starbucks may have benefited from illegal State aid in the form of tax rulings.
In general, tax rulings—which are “comfort letters” from by tax authorities giving, for example, a specific company clarity on how its corporate tax will be calculated—are not problematic from an EU State aid law perspective. The Commission does, however, have concerns that a tax ruling can be used to provide selective advantages to companies.
Tax rulings are often used to confirm transfer pricing agreements, which in turn influence the allocation of taxable profit between subsidiaries of a group located in different countries. The presence of State aid is excluded if a tax ruling only confirms the State aid conform calculation of the taxable basis. The calculation of the taxable basis is in line with the State aid rules, if the remuneration of a subsidiary or branch is based on market terms for commercial transactions between various parts of the same groups of a company. In contrast, if the calculation of the taxable basis is not based on market terms, it could imply that the taxable profit of the company concerned is overstated (in an EU Member State with a low corporate tax rate) or understated (in an EU Member State with a high corporate tax rate) and the company is allowed, overall, to pay less tax.
It is important to note that the Commission does not call into question the general tax regimes of Ireland, Luxembourg and the Netherlands. It is only investigating whether or not certain tax rulings adopted by the tax authorities in these EU Member States grant a selective advantage to certain companies. Furthermore, the Commission is not questioning the tax rate applied in these countries, but only the calculation of the taxable basis.
At the moment, only tax rulings relating to the three named companies are subject to a formal investigation by the Commission. The Commission has, however, made it clear in its press release that it will continue its wider inquiry into tax rulings in parallel with the investigations opened today. It is therefore to be expected that the Commission will open more formal investigations into alleged State aid granted by EU Member States—not necessarily only Ireland, Luxemburg and the Netherlands—to other multinational companies in the upcoming months.
If the Commission finds that a company benefitted from illegal State aid, it can order its recovery including interest. In this case, an EU Member State granting aid in the form of preferential tax rulings will have to recalculate the taxable basis of the company concerned in line with the State aid rules, plus the amount of taxes to be paid. In practice, the company concerned may have to pay additional corporate taxes in other EU Member States where it should have paid them in the first place, based on an allocation of their profits that conforms with State Aid rules.
Multinational companies with EU subsidiaries or branches should be aware that the State aid rules apply to tax measures, including the calculation of the taxable basis.