Luxembourg: Tax ruling in EC state aid investigation is published

Luxembourg: Tax ruling in EC state aid investigation

The European Commission published a non-confidential version of its decision to open a state aid investigation into a tax ruling obtained from the Luxembourg tax administration by a U.S. branch of a multinational corporation.

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Under EU law, the EC is obliged to review state aid granted by EU Member States, and tax rulings have been a focus of EC investigations. The EC decision was originally announced in early December 2015, when the EC took the preliminary view that the tax ruling issued by the Luxembourg tax administration may constitute state aid within the meaning of Article 107(1) of the EU Treaty. Read TaxNewsFlash-Transfer Pricing

EC investigation

The instant case concerns a Luxembourg company, a U.S. branch to which royalties received by the company were allocated. The Luxembourg tax administration issued a tax ruling in 2009, according to which the royalty income of the U.S. branch was—based on the double tax treaty with the United States—exempt from tax in Luxembourg even if this income was not subject to tax in the United States. A previous ruling had reached the same conclusion, but on the assumption that the income was subject to tax in the United States. 

The EC applied a three-step analysis to determine whether a tax measure constitute a selective advantage.

  • Identifying the so-called "reference system”
  • Determining whether the tax measure in question constitutes a derogation from that system in so far as it differentiates between economic operators that, in light of the objectives intrinsic to the system, are in a comparable factual and legal situation
  • Assessing whether an established derogation may nevertheless be justified by the nature or the general scheme of the reference system

The EC found the Luxembourg corporate income tax system is the reference system against which the tax ruling in question is to be examined, and that the Luxembourg corporate tax system also includes the network of income tax treaties to which Luxembourg is a party. The EC also found the tax ruling was a selective derogation from this system. 

In the view of the EC, the Luxembourg tax administration misapplied the tax treaty because there was no possibility that the United States would tax the income attributed to the U.S. branch. The EC concluded that the Luxembourg tax administration’s issuance of the tax ruling represented preferential treatment of the taxpayer and that no justification for this preferential treatment had been identified.


Read a June 2016 report prepared by KPMG’s EU Tax Centre

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