On 4 October 2017, the Commission found that Luxembourg had allegedly given illegal tax benefits to a US company operating an e-commerce platform. This decision follows other recent decisions adopted by the Commission which declared illegal certain tax benefits granted to companies since they conferred an undue advantage in violation of EU State aid rules.
EU Member States’ tax systems have been under increased scrutiny in the EU under State aid rules. The regime is specific to the EU and prohibits any form of advantage (e.g. financial support, better terms and conditions) conferred on a selective basis to companies by national public authorities. The regime provides for the prior notification of the aid measure to the Commission before its implementation.
In this case, the Commission found that the company had received an illegal advantage because of a tax ruling issued by Luxembourg. This ruling enabled profits to be shifted from an operating to a holding company of the multinational group. The holding company was not subject to tax in Luxembourg under the applicable legislation.
In essence, according to the Commission, the operating company paid an inflated royalty, not reflecting economic reality, to the holding company for the use of intellectual property rights. According to the statement by EU Competition Commissioner Margrethe Vestager (“Competition Commissioner”), “[it] reduced the operating company’s taxable profits to a quarter or what they were in reality”.
The Competition Commissioner also stressed that: “Tax rulings cannot endorse a royalty between one company to another company in the same group that does not reflect economic reality. Doing so would disadvantage all the stand-alone companies that are not part of a group. They are taxed on their actual profits because they pay market prices for the goods and services they use.”
Consistent with EU State aid rules, Luxembourg will have to recover from the company approximately EUR 250 million, plus interest, of unpaid tax.
In parallel, on the same day, the Commission announced it had decided to refer Ireland to the EU Court as it had failed to recover illegal tax benefits in another case. On 30 August 2016, the Commission found that the tax benefits granted by Ireland to a US technology company constituted State aid, which should have been recovered by 3 January 2017. However, more than a year after the Commission’s decision, Ireland had still failed to recover the illegal tax benefits. As a result, the Commission decided to use the procedure expressly provided for in Article 108 of the Treaty on the Functioning of the EU and directly refer the matter to the EU Court to ensure implementation of the recovery decision. If the Member State persists in its non compliance, the Court may impose penalty payments.
These cases are illustrative of the increased scrutiny of Member States’ tax practices, such as the tax rulings, i.e. any kind of tax arrangement between a Member State and a company. It is important for companies to be aware of these developments when devising their tax strategies, as even when they are validated by national authorities, they may need to repay significant amounts in case the scheme is considered to be an illegal tax benefit under the EU State aid rules. As stated by the Competition Commissioner, the Commission will continue its work in this direction: “Both send a clear message that companies must pay their fair share of tax. And our work is by no means done”.