On May 12, 2021, the General Court handed down two judgments on the Commission’s review under EU State aid rules of tax rulings in which the Luxembourg tax authorities had clarified in advance how national taxation provisions will apply to specific companies. The judgments were split:

  • In Amazon, the General Court annulled the Commission’s 2017 decision ordering Luxembourg to recover € 250 million in back-taxes from [1] The General Court ruled that the Commission had not proved to the required standard that a 2003 Luxembourg tax ruling had granted a selective advantage to Amazon.[2]
  • In Engie, however, the General Court upheld the Commission’s 2018 decision ordering Luxembourg to recover € 100 million from [3] The Court ruled that Engie—through two intra-group financing structures that treated the same transaction both as debt and as equity, with the result that the group’s profits remained untaxed—had received preferential tax treatment due to the non-application of a national measure relating to abuse of law.[4]

In both judgments, the General Court endorsed the Commission’s legal framework to review individual tax rulings. But the differing outcomes confirm that the EU Courts will scrutinize the Commission’s application of this legal framework in detail. The Amazon judgment, which follows a similar annulment in Apple (the Commission’s largest ever State aid recovery order)[5] and Starbucks,[6] represents a further setback to Commissioner Vestager’s strategy of using EU State aid rules to target what are perceived to be “sweetheart” tax deals given to multinational companies.

Figure 1: Commission Scrutiny Of Tax Rulings Under EU State Aid Rules

The General Court confirms the legal framework applied by the Commission to review individual tax rulings

The General Court began by endorsing the principles underpinning the Commission’s review of individual tax rulings under EU State aid rules.

  • The Commission has jurisdiction to review individual tax rulings under EU State aid The General Court confirmed that the Commission’s jurisdiction to investigate tax rulings does not amount to “tax harmonization in disguise”[7] and “is not excluded from the scope of the rules on the monitoring of State aid” despite Member States’ exclusive competence for direct taxation.[8] The Commission may consider that an individual tax ruling by a Member State for a specific company amounts to illegal State aid if the tax ruling gives a selective advantage to a company that deviates from “normal taxation” “compared with his or her position in the absence of the measure at issue.”[9]
  • The Commission can use the “arms’ length” principle and refer to OECD Guidelines to establish a selective To assess whether the tax rulings amounted to an advantage under State aid rules, the Commission relied on the “arms’ length” principle.[10] The arm’s length principle requires that financial relations within a group of companies should not differ from those between independent companies under market conditions. Reiterating its findings from Apple,[11] the General Court held that the Commission was entitled to use the principle to assess whether there was an undue reduction of the tax burden of an Amazon subsidiary or the Engie group. Moreover, when using the principle, the Commission can refer to, but is not bound by, OECD Guidelines on transfer pricing which, “reflect international consensus” and thus “have a certain practical significance in the interpretation of issues relating to transfer pricing.”[12]

The General Court exercises strict control over the Commission’s application of this legal framework

Individual tax rulings involve a complex, fact- specific assessment. In competition law cases, the EU Courts are often perceived to grant considerable deference to the Commission’s factual assessment. In Amazon, however, the General Court scrutinized closely whether the Commission had discharged its burden of proof in establishing a selective advantage.

Amazon. In its decision, using the arm’s length principle, the Commission concluded that the royalties paid by LuxOpCp to LuxSCS to use intangible assets were lower than what it would have obtained under normal market conditions, which reduced artificially LuxOpCo’s tax base. The General Court disagreed. It found that the Commission underestimated the functions performed by LuxSCS, notably its “unique and valuable” intangible assets.

More generally, the General Court also clarified the scope of the Commission’s burden of proof to demonstrate a selective advantage. The “mere finding of a methodological error” when applying a transfer pricing method does not suffice “to demonstrate that a tax ruling conferred an advantage on a specific company.”[13] The errors must result in “a reduction in the tax burden” of the beneficiary.[14] Here, the Commission had alleged but not demonstrated how the purported errors would undervalue LuxOpCo’s remuneration (and thus had not established an advantage arising from a reduced tax burden). The General Court therefore annulled the Commission’s decision.

Engie. In Engie, the General Court approved the Commission’s assessment of a complex intra-group financing structure that allegedly transferred business activity and financing between three companies belonging to the same group without any taxable profits.

The General Court did not dispute that the relevant Luxembourg tax rules had been applied correctly, but considered it necessary to go “beyond the legal form in order to look at the economic and fiscal reality of the structure,”[15] looking at the interdependent transactions between the three companies—rather than opting for a formalistic approach to isolate each of the transactions under the structure. In so doing, the Luxembourg tax authorities should have applied their abuse of law rules to a tax planning structure that allegedly deviated from the objectives of the tax system. Failure to apply these rules conferred a selective advantage on Engie by affording it preferential tax treatment.

Practical considerations

  • Tax ruling investigations under EU State aid rules are likely to The high-profile Amazon and Apple defeats show that investigating tax rulings under EU State aid rules has not been the policy tool the Commission hoped it would be. The EU Courts have demonstrated they will remain a limiting factor on the Commission’s policy goals in the tax ruling field. But despite the Amazon setback, the Commission is likely to welcome the General Court’s confirmation of its core approach to State aid investigations into tax rulings, including the use of the arm’s length principle.

It will be interesting to see whether the Commission will appeal the Amazon judgment. The Commission refrained from appealing the annulment in Starbucks but appealed in Apple.

One difficulty for the Commission is that an appeal would in principle be limited to points of law (or manifest distortion of facts), and the Amazon judgment centers on factual assessments relating to the Commission’s failure to satisfy the burden of proof for methodological errors. The Commission is likely to exercise particular caution in future decisions—particularly in its four open investigations.

  • Potential for EU legislative Faced with several defeats in the tax ruling ring (the General Court has now annulled four of eight tax ruling decisions),[16] the Commission may now look to other mechanisms to combat perceived tax advantages given to multinational companies by certain Member States. In July 2020, it was reported that the Commission was considering using a far-reaching, and so far unused treaty provision, Article 116 TFEU, which allows it to enact legislation to eliminate distortions of competition due to, for example, different tax rules between Member States.[17]

Legislation under Article 116 TFEU can be passed by a qualified majority (rather than unanimity), meaning no single Member State (nor even a grouping of the smaller Member States that have been the subject of the Commission’s decisions on tax rulings, i.e., Belgium, Ireland, Luxembourg, and the Netherlands) would be able to block such legislation.

These developments are occurring with tax advantages and perceived avoidance atop the EU’s target list. On June 1, 2021, EU Member State governments and the European Parliament announced country-by-country tax reporting rules to force multinational companies to disclose where they pay tax (and how much).[18] Most recently, on June 5, 2021, the G7 struck a “historic” agreement on taxing multinational companies.[19] In short, whether under the competition law framework validated by the Court or under some other instrument, tax scrutiny by the Commission is likely to continue.

[1]      Aid to Amazon – Luxembourg (Case SA.38944), Commission decision of October 4, 2017.

[2]      Luxembourg v. Commission and Amazon EU Sàrl and Amazon.com, Inc. v. Commission (“Amazon”) (Cases T-816/17 and T-318/18) EU:T:2021:252.

[3]      Aid to Engie (Case SA.44888), Commission decision of June 20, 2018.

[4]      Luxembourg v. Commission and Engie, Engie Global LNG Holding Sàrl, and Engie Invest International SA v. Commission (“Engie”) (Cases T-516/18 and T-535/18) EU:T:2021:251.

[5]      Ireland and Apple v. Commission (Cases T-778/16 and T-892/16) EU:T:2020:338.

[6]      Starbucks (Case T-760/15) EU:T:2019:669.

[7]      Engie, para. 160.

[8]      Amazon, para. 112; Engie, para. 138.

[9]      Amazon, paras. 114–116; Engie, paras. 138–141.

[10]    “This “arm’s length principle” aims to ensure that all economic operators are treated in the same manner when determining their taxable base for corporate income tax purposes, regardless of whether they form part of an integrated corporate group or operate as standalone companies on the market.” See DG Competition Working Paper on State Aid and Tax Rulings, June 2016, available at: https://ec.europa.eu/competition-policy/system/files/2021-04/specific_aid_ instruments_working_paper_tax_rulings.pdf.

[11]    Apple, paras. 224–225.

[12]    Amazon, para. 122.

[13]    Amazon, para. 545.

[14]    Amazon, para. 546.

[15]    Engie, para. 311.

[16]    The other three cases are Apple, Starbucks, and Belgium v. Commission and Magnetrol International v. Commission (“Belgian Excess Profits”) (Joined Cases T-131/16 and T-263/16) EU:T:2019:91. For information on the Commission’s ongoing investigations, see its Tax Rulings page, available at: https://ec.europa.eu/ competition-policy/state-aid/tax-rulings_en.

[17]    Financial Times, “Brussels plans attack on low tax member states,” July 14, 2020, available at: https://www.ft.com/content/4068b83a-2c64-43e9-b82a- 0b77c454164b.

[18]    Financial Times, “EU seals pact on forcing multinationals to report profits and tax,” June 1, 2021, available at: https://www.ft.com/content/8dc4e155-fae0- 4800-89fc-d647dba7872c.

[19]    Financial Times, “G7 strikes historic agreement on taxing multinationals,” June 5, 2021, available at: https://www.ft.com/content/a308bbff-5926-47a1-9202- 6263e667511e.