Amazon won, but Engie lost the court appeal in Luxembourg tax cases
The European General Court has ruled that Amazon’s cost-sharing arrangement in Luxembourg did not breach EU competition law.
The General Court says that there was no selective advantage in favour of a Luxembourg subsidiary of the Amazon group; as such, it annuls the Commission’s decision declaring the aid incompatible with the internal market. Accordingly, Amazon will not be expected to pay 250 million euros in back taxes.
As regards Engie in Luxembourg, the General Court has confirmed the Commission's decision that a set of tax rulings issued by Luxembourg artificially reduced Engie's tax bill by around 120 million euros.
Background to the disputes
From 2006, the Amazon group pursued its commercial activities in Europe through two companies (namely, Amazon Europe Holding Technologies and Amazon EU Sàrl) established in Luxembourg.
On 6 November 2003 the Luxembourg tax authorities granted said group a tax ruling that confirmed that Amazon Europe Holding Technologies was not subject to Luxembourg corporate income tax because of its legal form, and endorsed the method of calculating the annual royalty to be paid by Amazon EU Sàrl to Amazon Europe Holding Technologies under the licence agreement.
In 2014 the European Commission launched an investigation into Amazon's tax arrangement in Luxembourg, which concluded that Luxembourg had granted undue tax benefits of around 250 million euros. The Commission considered the deal illegal under EU rules because Amazon was allowed to pay substantially less tax than other businesses. As a result, almost three quarters of Amazon's profits were not taxed. So the Commission ordered the recovery of unpaid taxes from Amazon EU Sàrl.
The Commision held that the tax ruling, and its annual implementation from 2006 to 2014, constituted State aid, which is incompatible with the internal market.
Luxembourg and the Amazon group each brought an action seeking the annulment of that decision.
Between 2008 and 2014, the Luxembourg tax authorities adopted two sets of tax rulings in connection with intra-group financing structures relating to the transfer of activities between companies of the Engie group resident in Luxembourg.
In broad outline, the tax rulings endorsed two financing structures put in place by Engie that treated the same transaction both as debt and as equity, with the result that its profits remained untaxed.
The Commission, after requesting information about the contested tax rulings from the Luxembourg authorities, initiated a formal investigation procedure. At the end of the procedure, it determined that the result of the structures approved by the tax administration is that almost all of the profits made by the subsidiaries established in Luxembourg have not been taxed. In 2018 the Commission concluded that the contested tax rulings constitute illegal State aid that is incompatible with the internal market, which must be recovered from the recipients by the Luxembourg authorities. So the multinational company must pay 120 million euros in back taxes.
Luxembourg and the Engie group companies brought an action for annulment of the contested decision before the General Court.
Assessment of the General Court
First of all the General Court notes the settled case-law according to which, the very existence of an advantage may be established only when compared with ‘normal’ taxation.
Where national tax law does not make a distinction between integrated undertakings and standalone undertakings for the purposes of their liability to corporate income tax, it may be considered that that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices.
In that context, the General Court holds that the primary finding of an advantage is based on an analysis which is incorrect in several respects.
According to the General Court, the Commission did not take due account of the functions performed by Amazon Europe Holding Technologies for the purposes of exploiting the intangible assets in question or the risks borne by that company in that context.
The General Court holds that the Commission did not prove to the requisite legal standard that there was an undue reduction of the tax burden of a European subsidiary of the Amazon group.
The Commission could validly consider that certain functions performed by Amazon EU Sàrl in connection with the intangible assets went beyond mere ‘management’ functions, it nevertheless did not justify to the requisite legal standard the methodological choice it inferred from this.
The General Court concludes that none of the findings set out by the Commission in the contested decision are sufficient to demonstrate the existence of an advantage. Therefore, the contested decision must be annulled in its entirety.
Direct taxation being a matter that falls within the exclusive competence of the Member States, the General Court noted that Commission did not engage in any ‘tax harmonisation in disguise’ but exercised the power conferred on it by EU law.
The General Court rejects the pleas alleging errors of assessment and of law in the identification of a selective advantage giving rise to State aid.
In the present case, the General Court notes that the Commission sought to demonstrate that the contested tax rulings led to a reduction in the amount of tax which would normally have been payable under the ordinary tax regime. Consequently, those measures constitute a derogation from tax rules applicable to other taxpayers in the same factual and legal situation.
The General Court rejects the arguments relating to the absence of a selective advantage. The Court says that it is important to go beyond the legal form in order to look at the economic and fiscal reality of the structure. The General Court considers that the Commission was entitled to determine that the Luxembourg tax administration derogated from the reference framework by confirming the exemption.
The General Court concludes that the Commission has demonstrated the selectivity of the contested tax rulings in the light of the narrow reference framework.
In the contested decision, the Commission also investigated the selectivity of the contested tax rulings in the light of the provision relating to abuse of law, as an integral part of the Luxembourg corporate income tax system. The General Court finds that it cannot be disputed that the Engie group received preferential tax. Preferential tax treatment in Engie’s case resulted from Luxembourg’s non-application of national provisions relating to abuse of law.
Consequently, the General Court holds that the Commission demonstrated to the requisite legal standard a derogation from the reference framework.
Besides the Amazon and Engie decisions, the European Court of Justice must give judgment in multiple other significant State aid cases alleging that European Union Member States granted tax advantages to large corporations. In addition, several cases are still in the phase of formal State aid investigation by the European Commission, notably Huhtamäki in Luxembourg, Inter Ikea and Nike in the Netherlands.
The General Court has ruled in favour of the Commission in its State aid case against Fiat in Luxembourg but against the Commission in the Starbucks and Apple cases. Also, the opposing rulings in the Amazon and Engie cases could spell uncertainty for taxpayers with similar arrangements.
The Commission is using all tools at its disposal to fight unfair tax practices. But it seems that in certain cases, large multinational companies will continue to avoid paying hundreds of millions of euros in taxes in the Member States…
Author: Krisztina Széles, PhD student, University of Debrecen, Faculty of Law