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Luxembourg: EC finds illegal tax benefits granted in tax rulings

Luxembourg: EC finds illegal tax benefits granted

The European Commission today issued a release stating that Luxembourg allowed two group companies to avoid paying taxes on almost all their profits for about a decade—found to be “illegal” under EU State aid rules because the rulings provided an undue advantage. Luxembourg must now recover about €120 million in unpaid tax.

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As noted in the EC release, the tax rulings supported two complex hybrid convertible loan structures put in place by the taxpayer that treated the same transaction in an inconsistent way, both as debt and as equity, and that this “artificially reduced the company's tax burden.” The EC found that the taxpayer paid an effective corporate tax rate of 0.3% on certain profits in Luxembourg for about a decade.

The EC findings reveal that in 2008 and 2010, the taxpayer implemented two complex intra-group financing structures for two group companies in Luxembourg that involved a triangular transaction and two other group companies in Luxembourg. The EC concluded that Luxembourg's tax treatment of these financing structures did not reflect economic reality and that the tax rulings issued by Luxembourg endorsed an inconsistent treatment of the same transaction both as debt and as equity. On this basis, the EC concluded that the tax rulings granted a selective economic advantage to the taxpayer by allowing the group to pay less tax than other companies subject to the same national tax rules (the EC stated that the rulings enabled the taxpayer to avoid paying any tax on 99% of the profits generated by two group companies in Luxembourg).

The EC release sets out the details of the two structures. In essence, the companies each significantly reduce their taxable profits in Luxembourg by deducting expenses similar to interest payments for a loan, while at the same time, group member companies avoided paying any tax because Luxembourg tax rules exempt income from equity investments from taxation.

 

Read a June 2018 report prepared by KPMG’s EU Tax Centre

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