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European Commission challenge tax rulings as illegal state aid

  • Europe
  • Tax planning and consultancy - Briefings
  • Retail


Tax rulings are key to the operation of multinational businesses, delivering comfort on the application of unfamiliar tax rules by an unfamiliar tax authority.  This comfort is extremely important to multinational businesses, particularly since different activities (manufacturing, sales, research and development, finance, management) can often be undertaken by different group companies in multiple jurisdictions.  In these circumstances, tax rulings are vital to obtain certainty on the tax treatment of transactions and the allocation of profit between such group entities.

Businesses operating in the EU with the benefit of tax ruling consequently need to be aware that tax rulings are currently at the centre of a series of European Commission (EC) state aid investigations.  These investigations consist both of a general investigation into the system of tax rulings in the EU, as well as investigations into specific rulings agreed with certain high-profile taxpayers.

As explained below, if the jurisdictions in question are found to have provided illegal state aid, the businesses who have benefitted from such state aid will be required to repay the benefit of such illegal state aid that has accrued over the preceding 10 years, together with interest.

For the businesses currently under investigation, the potential financial consequences of these investigations are significant.  Of greater general significance, these specific investigations are likely to be test cases, potentially opening the door for the EC to challenge the tax rulings of other businesses on similar grounds.

Consequently, businesses operating within the EU with the benefit of tax rulings need to be aware of these investigations and the detailed allegations.  Such business should be analysing their own tax rulings to assess the risk of a future state aid challenge and, if that risk exists, consider what steps can be taken to mitigate such risk.

Set out below is brief overview of the current investigations and the legal basis for such investigations.

What is state aid?

EU competition law prohibits Member States from granting financial assistance in a way that distorts competition, unless authorised by the EC.  This prohibition can extend to tax rulings that provide selective advantages to specific companies or groups of companies.

More specifically, to constitute unlawful state aid, a tax ruling must meet the following conditions:

  • the ruling must grant an economic advantage;
  • this advantage must be financed through State resources;
  • the ruling must distort or threaten to distort trade and competition between Member States; and
  • the tax ruling must be specific or selective by benefitting “certain undertakings or the production of certain goods”.

EC investigation into tax rulings

The EU state aid rules have been used in the past to challenge harmful tax competition between Member States, but the current challenge to tax rulings is relatively recent, resulting predominately from media reports that high-profile multinational companies have obtained favourable tax rulings. The EC investigation mirrors other political moves to challenge the tax affairs of multinationals (for example, the ongoing BEPS project).  The Competition Directorate–General of the EC has set up a ‘task-force’ dedicated to investigating national tax rulings that validate advantageous tax positions for businesses, and the incoming competition commission, Margaret Vestager, has a clear mandate to use her powers to target such tax rulings.

Transfer pricing

The focus of these investigations, and indeed one of the main uses of tax rulings, are the transfer pricing arrangements put in place between group companies.  Transfer pricing arrangements are required pursuant to international tax rules that seek to allocate the profits of a business between different group companies and different jurisdictions by requiring transactions between such group companies to be undertaken (or at least taxed) on arm’s length terms (ie at a price/cost that would be paid between unrelated third parties).

While most jurisdictions have detailed transfer pricing rules, and a set of international principles and guidelines have been developed by the OECD, the determination of the appropriate arm’s length treatment of a transaction is ultimately subjective and tax authorities can, and often do, challenge the transfer pricing policies of businesses.  Consequently, tax rulings are frequently obtained by businesses in many different jurisdictions to give comfort that the tax authorities of that jurisdiction will not challenge the relevant transfer pricing policies applied.

Selective tax advantage

The EC has stated that it has no problem per se with tax rulings on this area.  However, the EC is concerned that some jurisdictions are using the tax ruling system to provide selective tax advantages to certain businesses through granting rulings for arrangements that are, in the view of the EC, not in line with the arm’s length principle and the OECD transfer pricing guidelines.

As demonstrated by the EC’s preliminary findings in the Apple investigation, it is the view of the EC that such tax rulings can and do meet the criteria of illegal state aid:

  •  an economic advantage can be obtained through a tax ruling that agrees a basis of taxation not in line with arm’s length principles (ie a reduced tax bill);
  • by its nature, such advantage is financed through State resources since tax revenues would be reduced;
  • such a tax ruling distorts trade and competition with Member States who do apply the arm’s length principle correctly;
  • the bilateral nature of a tax ruling is likely to mean that a ruling is specific or selective.

What happens next?

On 30 September 2014, the EC published its preliminary findings on certain tax ruling between Apple and the Irish tax authorities and Fiat and the Luxembourg tax authorities.  In both cases, the EC concluded that the arrangements constituted illegal state aid and a further formal investigation has been opened. 

These investigations will be ongoing for some time, with formal state aid investigations normally taking between 3-18 months.  In addition, any decision of the EC could be appealed ultimately to the European Court of Justice and, given the amounts at stake for the businesses subject to the specific investigations, it seems likely that a finding of illegal state aid would be appealed. As a result, it is likely to still be a long time before any certainty exists for taxpayers on this issue.

What is clear is that the EC are taking this issue very seriously and are utilising a very powerful tool in their armoury to pursue Member States and, indirectly, taxpayers.

What should businesses do now?

Businesses who have obtained any tax rulings from an EU Member State should further consider the potential impact of these preliminary state aid rulings and the ongoing investigations.

The jurisdictions currently involved with formal investigations are Luxembourg, Ireland and the Netherlands, with Luxembourg being the subject of two investigations and therefore of particular focus.  Multinational businesses operating in these jurisdictions with the benefit of tax rulings should take particular care to review these rulings and their basis.  To the extent any state aid risk exists, it may be possible to take protective measures at this stage to mitigate the impact of a potential future state aid challenge.