The European Commission today announced a decision that Luxembourg and the Netherlands granted selective tax advantages to two multinational corporate entities, and as such, these “tax advantages” are illegal under EU state aid rules. The EC concluded that the tax rulings granted by the tax authorities in Luxembourg and in the Netherlands artificially lowered the tax paid by the companies in the respective jurisdictions.
These decisions confirm the Commission’s preliminary view that the rulings in question involved State aid. This aid has now been determined to be incompatible with the internal market, and must be recovered (with interest) by the relevant national authorities from the beneficiaries of the aid.
Today’s EC release explains that tax rulings—comfort letters issued by tax authorities to give a company clarity on how its corporate tax will be calculated or on the use of special tax provisions—are “perfectly legal” but that the two tax rulings under investigation endorsed “artificial and complex methods” to establish taxable profits for the companies. The EC concluded that this did not reflect “economic reality” because it set transfer prices for goods and services sold between companies of the two corporate groups that did not correspond to market conditions. The EC stated that because of the tax rulings, most of the profits of one multinational corporation were shifted abroad, to jurisdictions where they were not taxed, and the other corporation only paid taxes on underestimated profits.
The EC further explained that:
Tax rulings cannot use methodologies, no matter how complex, to establish transfer prices with no economic justification and which unduly shift profits to reduce the taxes paid by the company. It would give that company an unfair competitive advantage over other companies (typically SMEs) that are taxed on their actual profits because they pay market prices for the goods and services they use.The EC ordered Luxembourg and the Netherlands to recover the unpaid tax from the corporations, with the amounts to be recover ranging from €20 to €30 million for each company. It also means that the companies can no longer continue to benefit from the advantageous tax treatment granted by these tax rulings.
The EC release also states that the EC will continue to pursue its inquiry into the tax rulings practices in all EU Member States, and that existing formal investigations into tax rulings in Belgium, Ireland, and Luxembourg are ongoing.
Read an October 2015 report prepared by KPMG’s EU Tax Centre