Global menu

Our global pages


European Commission opens further State aid investigations into Luxembourg tax rulings

  • United Kingdom
  • State aid - State aid
  • Tax planning and consultancy


On 7 March 2019, the European Commission announced that it had opened an in-depth State aid investigation into three tax rulings granted by Luxembourg to Huhtalux S.à.r.l, a Luxembourg-based finance company within the Finnish-headed Huhtamäki group. The Commission has now published the non-confidential version of its opening decision.

What is the focus of the investigation?

The Commission’s investigation relates to three tax rulings issued by Luxembourg to Huhtalux in 2009, 2012 and 2013. The 2009 ruling was one of the rulings disclosed as part of the “Luxleaks” investigation in 2014.

Huhtalux acts as a group finance company. It receives interest-free loan financing from another company in the Huhtamäki group based in Ireland, which it then uses to finance other Huhtamäki entities by way of interest-bearing loans. The rulings relate the computation of Huhtalux’s corporate income tax liability in relation to these arrangements.

In particular, the rulings provide for Huhtalux to be taxed on an agreed minimum profit margin, which Luxembourg considers to be an arm’s length remuneration for the financing activities it performs. In order to achieve this, Huhtalux is allowed to deduct an amount equal to the difference between the actual profit from its financing activity and its agreed profit margin from its tax base. This amount is referred to as “deemed interest”.

Deemed interest does not correspond to actual interest payments. The effect of the deemed interest deductions is therefore that only part of the profit recorded in Huhtalux’s accounts (i.e. the agreed profit margin) is included in its tax base and subject to tax. Luxembourg considers that these deemed interest amounts correspond to the interest payments that would have been payable on equivalent loans from an independent third party in the market, and as a result the agreed profit margin is in line with the arm’s length principle.

Luxembourg has maintained that the treatment provided for by the rulings is consistent with applicable legislation which allows the Luxembourg tax authorities to adjust the accounting income of a company either upwards or, as in this case, downwards in order to ensure that a company’s taxable income matches the income truly generated in Luxembourg.

Importantly, though, the opening decision notes that Luxembourg did not confirm that corresponding upwards adjustments would be made in the tax base of the Irish lender prior to granting the rulings.

In its opening decision, the Commission notes that under the Luxembourg corporate income tax system the starting point for determining a company’s tax liability is its accounting profit. It considers that allowing Huhtalux to exclude from tax a portion of its commercial profits in principle constitutes a derogation from this position. The Commission is concerned that this derogation may grant Huhtalux a selective advantage, on the basis that it allows the Huhtamäki group to pay less tax than standalone companies or group companies whose transactions are priced in accordance with market terms. The Commission’s initial view is that this advantage cannot be justified.

If the Commission’s concerns are confirmed following its in-depth investigation the rulings in question would be deemed to constitute illegal State aid which would have to be recovered from Huhtalux with interest.

Why might a tax arrangement give rise to State aid issues?

EU State aid rules are concerned with the risk of competition in the internal market being distorted through the use of State resources that confers an advantage to certain businesses (referred to as a “selective advantage”).

In line with other tax State aid investigations, the Commission’s concern here is that the tax rulings might constitute a derogation from the otherwise applicable tax framework without justification, with the effect that Huhtalux’s financial position is improved as compared to businesses in a comparable factual and legal situation. On that basis the Commission’s current view is that the tax rulings at issue would appear to confer a selective advantage to Huhtalux. The income which the State foregoes as a result of the “disapplication” of the otherwise applicable tax system in this way would constitute State aid.

What is the broader context?

This is the latest in a series of State aid investigations launched by the Commission into individual tax rulings and tax schemes of EU Member States since June 2013.

Previous high-profile State aid investigations relating to tax include the Commission’s investigations into Luxembourg’s treatment of Amazon, McDonalds, Fiat and Engie, Ireland’s treatment of Apple, the Netherlands’ treatment of Starbucks, Inter IKEA and Nike, Belgium’s excess profit ruling regime (“EPR”) and, the group financing exemption available under the UK’s controlled foreign company (CFC) rules.

The investigations into the Netherlands’ treatment of Nike and Inter IKEA are ongoing. The other investigations have all concluded, with the Commission finding in all but one case (that of McDonalds) that the arrangements constituted illegal State aid (at least in part).

Following an appeal, the EU General Court annulled the Commission’s decision in relation to Belgium’s EPR regime, in February 2019. However, since the Court’s annulment decision was based essentially on the technical point that the arrangements did not constitute an “aid scheme”, as the Commission had assumed in its original decision, the court did not address the key question of selectivity in the context of tax rulings.

The Commission’s decisions in relation to the treatment of Apple, Amazon, Starbucks, Engie and Fiat have all been appealed and decisions are awaited.

How can we help you?

If you would like to discuss this or any other State aid investigations with us please contact our specialists, Totis Kotsonis, competition lawyer and State aid expert, and Ben Jones, Olivier Gaston-Braud and Helen Mackey, tax law experts, via the contact details below.