On November 8, 2022, the Court of Justice set aside the General Court’s judgment in the Fiat State aid case.[1] In doing so, the Court of Justice effectively annulled the Commission decision which found that the tax ruling granted to the Fiat Chrysler group by the tax authorities of Luxembourg was an unlawful tax break of €20–30 million.[2] The Court of Justice affirmed the supremacy of national law in corporate taxation and rejected the Commission’s attempt to develop an EU-wide arm’s length principle as a standard of review for Member States’ tax decisions under State aid rules. The judgment is a setback for the Commission’s policy of using State aid rules to target allegedly unfair tax deals for multinational companies.

State aid and tax fairness – the current state of play

In the EU, Member States decide on their own tax legislation and the EU only has limited competences over tax linked to the smooth running of the single market. However, free competition over tax matters and a lack of cooperation between Member States has created “disconnection between where value is created and where profits are taxed”[3] and allowed multinational companies to engage in aggressive tax planning practices to pay the least tax possible (“tax avoidance”).

Amid this backdrop, the Commission took a series of enforcement actions that used State aid tools to tackle Member State tax decisions. Many of these cases – including the Fiat case – focused on transfer pricing arrangements,[4] but the Commission has also challenged other tax practices.[5] Under EU State aid rules, Member States cannot provide subsidies (including fiscal incentives) to selectively benefit a business outside of narrowly-defined exceptions. The Commission has contended that countries such as Belgium, Ireland, Luxembourg and the Netherlands applied their tax rules in a way that amounted to illegal State aid. These efforts have been criticized as “harmonization through the back door”, as legal commentators have questioned the novel reasoning adopted by the Commission in these cases.[6]

In Fiat, the Court of Justice ruled on the key issue of whether the Commission can assess the existence of a selective advantage in light of an arm’s length principle defined at EU level. The Court of Justice struck down the Commission’s view that the arm’s length principle applies “independently of whether a Member State has incorporated this principle into its national legal system” as “a general principle of equal treatment in taxation falling within the application of Article 107(1) of the TFEU”.[7] Instead, the Court of Justice clarified that the arm’s length principle may only be used to the extent it forms part of the relevant national tax system, and required the Commission to fully examine how the principle is integrated and applied in the relevant national law. The judgment will likely impact other tax ruling cases. Indeed, among the at least 11 Commission State aid investigations and decisions since 2013 in relation to tax rulings[8], three are pending appeal before the Court of Justice, including the Apple[9] and Amazon[10] cases, in which the General Court had upheld the Commission’s application of the arm’s length principle. In addition, at least three investigations[11] are ongoing, in which the Commission will have to assess the existence of a selective advantage and any violation of the arm’s length principle by reference to the national tax system.

The Commission continues to pursue “tax fairness” as a policy priority. In December 2022, Vice President Vestager commented that: “Ending unfair tax subsidies protects the interests of taxpayers. And it is a step towards addressing the rising inequality that is tearing our societies apart.”[12] The Commission will continue to focus on State aid enforcement and has proposed legislation to establish a “Framework for Income Taxation” which will introduce a common set of rules for EU companies to calculate their taxable base and allocate profits between Member States.[13]

Notion of State aid: when does a tax ruling confer an unlawful “advantage”?

A Member State measure amounts to State aid if several core elements are met: (a) the measure involves the use of State resources; (b) the measure confers an “advantage” on the recipient; (c) this advantage is “selective” (i.e., only available to specific companies or sectors); and (d) the measure distorts competition and affects trade between Member States.

In Fiat, the Commission assessed the existence of an “advantage” by comparison to a benchmark based on the “arms-length” principle, i.e., the behavior of independent companies negotiating under market conditions. However, the Commission failed to consider whether and how this principle had been incorporated into Luxembourg national law, but rather, sought to apply an “abstract expression of that principle” based on OECD Guidelines. The Court of Justice confirmed that the Commission should carry out its State aid assessment “based exclusively on the normal tax rules laid down by the legislature of the Member State concerned” and should only have taken into account such external rules to the extent they had been incorporated in national law.

The Commission’s decision in Fiat Chrysler

In September 2012, the Luxembourg tax authorities adopted a tax ruling in favor of Fiat Chrysler Finance Europe, formerly Fiat Finance and Trade (“Fiat”), a Luxembourg-based subsidiary of the Fiat Chrysler group, approving a transfer pricing arrangement governing intra-group financing transactions (the “Tax Ruling”). A tax ruling is a decision by a tax authority on the tax treatment of a given arrangement and is used to provide certainty to companies. Fiat Finance and Trade performs treasury functions for the Fiat Chrysler group: it raises funds in the market through loans, bond issuances and fund investments and makes them available to European companies within the Fiat group through intercompany loans. The Tax Ruling concerned the methodology for determining the taxable profit of Fiat Finance and Trade.

In October 2015, the Commission found that the Tax Ruling constituted illegal State aid and ordered Luxembourg to recover the unpaid tax from Fiat.[14] The Commission examined the methodology adopted by the Luxembourg tax authorities and concluded that it did not correspond to market-based outcomes and thus conferred an illegal selective advantage under Article 107 TFEU.[15] According to the Commission, the Tax Ruling: (i) calculated a capital base that was much lower than Fiat Finance and Trade’s actual capital; and (ii) applied lower-than-market rates in estimating the remuneration applied to that capital.[16] The Commission found that taxable profits declared in Luxembourg would have been 20 times higher if the capital and remuneration calculations had been consistent with market conditions.[17] Fiat’s taxes, therefore, had been calculated based on underestimated profits. As a result, Luxembourg granted Fiat an illegal “tax break” of €20–30 million.[18]

Fiat and Luxembourg challenged the Commission’s decision before the General Court, which upheld the Commission’s decision in September 2019. The General Court held that the Commission had appropriately used the arm’s length principle in determining that, as a result of the Tax Ruling, Fiat was given a selective economic advantage compared to similarly situated companies.[19] Fiat – together with Ireland, as an interested Member State[20] – appealed the General Court’s ruling before the Court of Justice.

The Court of Justice judgment

The Court of Justice sided with the appellants. It first reiterated the applicable principles to assess whether a national tax measure confers a selective advantage. As a first step, the Commission must identify the reference system, that is, the “normal” tax system applicable in the Member State concerned. As a second step, the Commission must demonstrate that “the tax measure at issue is a derogation from that reference system” because it applies differential treatment to similarly situated entities, unless such differentiation is “justified, in the sense that it flows from the nature or general structure of the system of which those measures form part.”[21]

The Court of Justice emphasized that the identification of the applicable reference system is “an essential prerequisite for assessing not only the existence of an advantage, but also whether it is selective in nature.”[22] However, the Commission had applied the wrong approach in defining the reference system as it should have examined the Tax Ruling on the basis of Luxembourg tax law and any version of the arm’s length principle incorporated therein.[23] This is because, in the absence of harmonization in EU law, the rules for the application of that principle “are defined by national law and must be taken into account in order to identify the reference framework for the purposes of determining the existence of a selective advantage.”[24] In this context, the Court of Justice explained that parameters and rules external to the national tax system at issue, such as the OECD Transfer Pricing Guidelines, are relevant only to the extent that these external rules are incorporated in national law.[25] But the Commission applied a different arm’s length principle from that defined in Luxembourg law, and “confined itself to identifying […] the abstract expression of that principle,” rather than examining “the content, interaction and concrete effects” of the Luxembourg tax rules.[26] The Commission decided that the arm’s length principle formed part of its assessment irrespective of whether it had been incorporated in the national legal system and also disregarded Luxembourg’s own Tax Code and tax circulars that sought to apply this principle. In doing so, the Commission infringed the well- established rule of the Member States’ autonomy in the field of direct taxation.[27]

The Court of Justice further clarified that there is no autonomous arm’s length principle in EU law that could apply independently of the incorporation of that principle into national law. It clarified, in that regard, that the Belgium and Forum 187 v Commission judgment,[28] which the Commission cited in its decision to support its position, referred to the arm’s length principle as incorporated into Belgian law and did not establish a generally-applicable arm’s length principle in EU law.[29]

Despite emphasizing the primacy of national laws and policy in the State aid assessment of tax measures, the Court of Justice left the door open for the Commission to challenge a Member State’s interpretation of the arm’s length principle when identifying a “selective advantage”. It observed that the Commission could establish that “the parameters laid down by national law are manifestly inconsistent with the objective of non-discriminatory taxation […] pursued by the national tax system, by systematically leading to an undervaluation of the transfer prices applicable to [certain companies] as compared to market prices for comparable transactions carried out by [comparable companies].”[30] Accordingly, the Court of Justice affirmed that tax measures are not exempted from the scope of State aid rules and the Commission could seek to disregard national rules that clearly contradict the stated objectives of a national tax framework.


The Court of Justice’s judgment in Fiat deals a blow to the Commission’s efforts to tackle inconsistent Member State tax practices through the deployment of “objective” EU-level standards. The judgment clarifies the boundaries of EU competences – in this case, the State aid regime – and Member State autonomy in tax matters. It will not, however, be the last word in EU efforts to regulate Member State corporate taxation, as the Commission has promised to continue pursuing enforcement and legislative initiatives in this area.

[1]      Fiat Chrysler Finance Europe and Ireland v Commission (Cases C-885/19 P and C-898/19 P) EU:C:2022:859 (the “Fiat Judgment”); Luxembourg and Fiat Chrysler Finance Europe v Commission (Cases T-755/15 and T-759/15) EU:T:2019:670.

[2]      State aid which Luxembourg granted to Fiat (Case COMP/SA.38375), Commission decision of October 21, 2015 (the “Fiat Commission Decision”).

[3]      European Parliament, Report on tax rulings and other measures similar in nature or effect, November 5, 2015, available here.

[4]      See e.g., State aid implemented by the Netherlands to Starbucks (Case COMP/SA.38374), Commission decision of October 21, 2015; Excess profit exemption in Belgium (Case COMP/SA.37667), Commission decision of January 11, 2016; and State aid implemented in Ireland to Apple (Case COMP/SA.38373), Commission decision of August 30, 2016.

[5]      For instance, in the Engie case, the Commission scrutinized tax rulings approving the legal treatment of payments which led to reduced profits or tax exemptions (State aid implemented by Luxembourg in favor of Engie (Case COMP/SA.44888), Commission decision of June 20, 2018). In McDonald’s, the Commission investigated, but did not ultimately sanction, the double non-taxation of McDonald’s profits under Luxembourg national law and the Luxembourg-US Double Taxation Treaty (Tax rulings granted by Luxembourg in favor of McDonald’s Europe (Case COMP/ SA.38945), Commission decision of September 19, 2018).

[6]      See e.g., G. Allevato, “Judicial Review of the State Aid Decisions on Advance Tax Rulings: A Last Resort to Safeguard the Rule of Law”, European Taxation, 2022 (Volume 62), No.2 and commentary cited.

[7]      Fiat Commission Decision, para. 228.

[8]      For an illustrative overview of the Commission’s activities with respect to tax rulings, see here.

[9]      Aid to Apple (Case COMP/SA.38373), Commission decision of August 30, 2016 (the “Apple decision”); and Ireland and Apple v. Commission (Cases T-778/16 and T-892/16) EU:T:2020:338, see paras. 224-225.

[10]    Aid to Amazon (Case COMP/SA.38944), Commission decision of November 4, 2017; and Amazon (Cases T-816/17 and T-318/18) ECLI:EU:T:2021:252, see para 122.

[11]    Aid to Huhtamäki (Case COMP/SA.50400), Commission decision of March 7, 2019, initiating the formal investigation procedure; IKEA (Case COMP/ SA.46470), Commission decision of December 18, 2017, initiating the formal investigation procedure; and Aid to Nike (Case COMP/SA.51284), Commission decision of January 10, 2019, initiating the formal investigation procedure.

[12]    Commissioner Vestager, Competition in the wider policy context, Speech to OECD 21st meeting of the Global Forum on Competition, Paris, December 1, 2022, available here.

[13]    European Commission, Business in Europe: Framework for Income Taxation (BEFIT), public consultation launched on October 13, 2022, available here. More recently on December 12, 2022, the Council of the EU also agreed to adopt the Directive on ensuring a global minimum level of taxation for multinational enterprise groups and large-scale domestic groups in the Union, which seeks to reduce opportunities for tax base erosion and profit shifting and aims to ensure companies subject to the rules are taxed at a minimum rate of 15% (see Council of the EU Press Release, “International taxation: Council reaches agreement on a minimum level of taxation for largest corporations”, December 12, 2022, available here).

[14]    Fiat Commission Decision, paras. 354-371.

[15]    Commission Press Release IP/15/5880, “Commission decides selective tax advantages for Fiat in Luxembourg and Starbucks in the Netherlands are illegal under EU state aid rules,” October 21, 2015 and Fiat Commission Decision, paras. 339-340 and 346-347.

[16]    Fiat Commission Decision, paras. 234-311 ; see also our October–December 2015 European Competition Report, pp. 11-12.

[17]    See Commission Press Release IP/15/5880, “Commission decides selective tax advantages for Fiat in Luxembourg and Starbucks in the Netherlands are illegal under EU state aid rules,” October 21, 2015 and Fiat Commission Decision, paras. 311 and 365-369.

[18]    See Commission Press Release IP/15/5880, “Commission decides selective tax advantages for Fiat in Luxembourg and Starbucks in the Netherlands are illegal under EU state aid rules,” October 21, 2015.

[19]    Luxembourg v. Commission (Case T-755/15) EU:T:2019:670, paras. 359–367; see also our August–September 2019 EU Competition Law Newsletter, pp. 5-6.

[20]    Ireland had the right to appeal the General Court judgment, because it supported both Fiat and Luxembourg before the General Court as an intervener.

[21]    Fiat Judgment, para. 68.

[22]    Ibid, para. 74.

[23]    Ibid, paras. 91-93.

[24]    Ibid, para. 93 and 95.

[25]    Ibid, paras. 96-97.

[26]    Ibid, paras 91-92.

[27]    Ibid, para. 94.

[28]    Belgium and Forum 187 v. Commission (Cases C-182/03 and C-217/03) ECLI:EU:C:2006:416.

[29]    Fiat Judgment, para. 104.

[30]    Ibid, para. 122.