On 7 October 2014, the European Commission (the Commission) announced that it had opened an in-depth investigation into a ruling by Luxembourg’s tax authorities with regard to Amazon’s corporate income tax.1  The Amazon investigation follows similar investigations into three other companies − Apple, Fiat Finance and Trade (FFT) and Starbucks − in which the Commission published its formal decisions opening the investigations on 30 September 2014 (the Opening Decisions).2  All four cases concern tax rulings dealing with transfer pricing arrangements between entities of the same corporate group.

These investigations should be seen in the context of the Commission’s broader investigations into certain tax-related practices, including in particular transfer pricing and taxation of profits from using or licensing intellectual property rights (IPR).3  Magrethe Vestager, who will replace Joaquin Almunia as competition commissioner as of November 2014, has indicated that these investigations will be a priority for the new Commission team.

The Opening Decisions shed more light on the Commission’s concerns as to the compatibility of tax rulings with EU State aid rules. According to the Opening Decisions, the Commission’s preliminary view is that the contested tax rulings constitute unlawful State aid under EU law. The relevant Member States are requested to comment on the Opening Decisions and to provide certain additional information.

If the Commission’s in-depth investigations confirm that the contested rulings amount to illegal State aid, the Member States concerned will be required to recover the amount of the aid, plus interest, for up to ten years. These in-depth investigations make clear that the Commission will not wait for the conclusions of its broader inquiry to pursue potential violations involving specific companies.


Although the Commission has no direct authority over national tax systems, it can investigate whether certain fiscal regimes, including in the form of tax rulings, would constitute “unjustifiable” State aid to companies. The EU’s State aid rules are set out in the Treaty on the Functioning of the European Union (TFEU) and constitute part of the TFEU’s provisions on competition law. In general, Member States are prohibited from granting financial assistance in a way that distorts competition, unless the aid measure has been notified to and authorized by the Commission. The prohibition applies to any form of financial aid, including in the form of tax rulings. Although not problematic in themselves, tax rulings may amount to unlawful State aid if they provide selective advantages to a specific company or group of companies that are not approved under EU State aid rules.

Article 108(3) TFEU requires Member States to notify non-exempted State aid measures, including in the form of tax measures, to the Commission before their implementation, and to await the Commission’s approval before implementing such measures (the so-called “standstill obligation”). If either of those obligations is not fulfilled, the State aid measure is considered to be unlawful.

A notification triggers a preliminary investigation by the Commission. The Commission can also investigate unnotified State aid that has already been granted on its own initiative or following a third-party complaint.  If, following an in-depth investigation, the Commission finds that a measure constitutes illegal State aid, the Commission will require the Member State to recover the aid from the beneficiary (unless such recovery would be contrary to a general principle of EU law). In the case of tax measures, the amount to be covered is calculated “on the basis of a comparison between the tax actually paid and the amount that should have been paid if the generally applicable rule had been applied”. Interest is added to this basic amount. Recovery of past benefits can be ordered for up to ten years.

When can tax rulings constitute unlawful state aid?

Article 107(1) TFEU prohibits “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it affects trade between Member States.”

Measures taken to exempt a company from an obligation to pay taxes can amount to unlawful State aid if the following conditions are met:

  • First, the tax measure must grant an economic advantage. In the case of tax rulings, an advantage will in principle exist where the tax payable under the tax ruling is lower than the tax that would otherwise have to be paid under the normally applicable tax system. The general rule is that the allocation of profit between companies of the same corporate group must comply with the “arm’s length principle” as set in Article 9 of the OECD Model Tax convention.  In the case of transfer pricing agreements, this means that arrangements between companies of the same corporate group must not depart from arrangements that a prudent independent operator acting under normal market conditions would have accepted. The Court of Justice of the European Union has confirmed that if the method of taxation for intra-group transfers does not comply with the arm’s-length principle and leads to a lower taxable base than would result from a correct implementation of that principle, it provides a selective advantage to the company concerned.4
  • Second, the advantage must be financed through State resources. In cases where a tax authority lowers the effective tax rate that would otherwise be payable, the resulting loss of revenue for the State is equivalent to the use of State resources.
  • Third, the tax measure must distort or threaten to distort trade and competition between Member States. Where the beneficiary carries out an economic activity in the EU, this criterion is easily met.
  • Finally, the tax measure must be specific or selective in that it benefits “certain undertakings or the production of certain goods”. According to the Commission, “every decision of the administration that departs from the general tax rules to the benefit of individual undertakings in principle leads to a presumption of State aid and must be analysed in detail.”5  Thus, a tax ruling that merely interprets general tax rules or manages tax revenue based on objective criteria will generally not constitute State aid, while a ruling that applies the authorities’ discretion to apply a lower effective tax rate than would otherwise apply may amount to State aid.  In the case of transfer pricing agreements, a tax ruling that deviates from the arm’s-length principle  is likely to be considered as specific and hence qualify as State aid under EU law.

The classification of a tax benefit as general or specific is therefore crucial to determine its validity. Even a measure that appears prima facie to be general may be selective in practice. Thus, in the Gibraltar case,6 a corporate tax reform for companies operating in Gibraltar was found to be selective because it favoured off-shore companies, even though it appeared to be applicable to all undertakings domiciled in Gibraltar. The ECJ ruled that “the fact that offshore companies are not taxed is… the inevitable consequence of the fact that the bases of assessment are specifically designed so that offshore companies, which by their nature have no employees and do not occupy business premises, have no tax base under the bases of assessment adopted in the proposed tax reform.”7

If one of the tax measures in question constitutes State aid, it could in principle benefit from an exemption under the TFEU, but such exemptions generally apply to tax relief granted for a specific project, such as investing in disadvantaged areas or promoting culture and heritage conservation, and are limited to the costs of carrying out such projects. In the Opening Decisions, the Commission has indicated that, at this stage of the investigations, it has no indication that the contested rulings can benefit from an exemption under the TFEU.


While the Commission has not yet reached a final decision with regard to the tax rulings under scrutiny in the ongoing investigations, the Opening Decisions indicate that the Commission’s preliminary view is that these rulings are likely to constitute unlawful State aid under EU law. If the in-depth investigations confirm this view, the companies concerned will have to repay the aid received, plus interest. 

Before opening these specific investigations, the Commission was already conducting a wider inquiry into certain tax practices by several Member States.  Through its four in-depth investigations, however, the Commission has made clear that it will not wait for the conclusions of its broader inquiry to pursue potential violations involving specific companies.  

Companies that have benefited from tax rulings or other special tax measures are advised to assess the possibility that tax benefits negotiated as part of their European tax planning may constitute unlawful State aid. More generally, companies are reminded to take account not only of the applicable tax rules as part of their global tax planning, but also of potential State aid considerations.