Luxembourg: EC state aid investigation, tax treatment of French utility

Luxembourg: EC state aid investigation, French utility

The European Commission today announced the opening of an in-depth investigation into Luxembourg's tax treatment of a French electric utility.

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The EC release states that there are concerns that several tax rulings issued by Luxembourg may have given the taxpayer “an unfair advantage” over other companies, in breach of EU state aid rules.

State aid investigation

The EC will assess whether Luxembourg tax authorities selectively derogated from provisions of national tax law in tax rulings issued to the French electric utility—that is, whether the tax rulings treat the same financial transaction relating to two zero-interest convertible loans in an inconsistent way, both as debt and as equity. The EC found that the treatment endorsed in the tax rulings resulted in tax benefits in the taxpayer’s favor, and this treatment is not available to other companies subject to the same national taxation rules in Luxembourg.

At this stage, the EC has determined the following about tax rulings concerning two financial transactions:

  • Both transactions are treated as debt and as equity. 
  • This is an inconsistent tax treatment of the same transaction.
  • On the one hand, borrowers can make provisions for interest payments to the lenders (transactions treated as loan) whereas on the other hand, the lenders' income is considered to be equity remuneration similar to a dividend from the borrowers (transactions treated as equity).
  • The tax treatment appears to give rise to double non-taxation for both lenders and borrowers on profits arising in Luxembourg. This is because the borrowers can significantly reduce their taxable profits in Luxembourg by deducting the (provisioned) interest payments of the transaction as expenses. At the same time, the lenders avoid paying any tax on the profits the transactions generate for them, because Luxembourg tax rules exempt income from equity investments from taxation.

The final result, according to the EC release, is that a significant proportion of the profits through the two arrangements are not taxed at all.

Other state aid investigations

Other EC state aid investigations concern:

  • Transfer prices that do not reflect economic reality
  • Profit allocation methods that do not reflect economic reality
  • Inconsistent application of national law, giving rise to a discretionary double non-taxation—today’s investigation into Luxembourg's tax treatment of the French utility looks into an alleged inconsistent application of national tax law endorsed in the tax rulings, leading to double non-taxation


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

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