On 7 March 2019, the European Commission launched an investigation to evaluate whether the tax rulings granted to a Finnish food and drink packaging group by Luxembourg constitute State aid within the meaning of EU law.
Under EU law, the Commission is obliged to review whether Member States give companies preferential treatment incompatible with applicable State aid rules.
Tax rulings have increasingly drawn public attention as their investigation became part of what the Commission refers to as a wider strategy towards tax transparency and fair taxation.
This has led to inquiries into the compatibility of the tax ruling practices of certain Member States with EU law.
As regards the current investigation, the Commission opened the preliminary investigation following the disclosure of one of the three rulings under scrutiny as part of the ‘Luxleaks’ investigation.
The European Commission’s concerns relate to a Luxembourg resident company that is part of a Finnish group and carries out intra-group financing activities.
The Luxembourg entity receives interest-free loans from another group company based in Ireland. These funds are then used to finance other group companies through interest-bearing loans.
The Commission indicates that, under the three tax rulings issued between 2009 and 2013, the Luxembourg company was allowed to unilaterally deduct from its taxable base fictitious interest payments on the interest-free loans received from the Irish group company. According to the Commission, this unilateral downward adjustment may grant the Luxembourg company a selective advantage over other stand-alone or group companies subject to the same national tax rules.
During the in-depth investigation, the Commission will assess whether Luxembourg allowed the Finnish group to pay less tax than other stand-alone or group companies whose transactions are priced in accordance with market terms. If confirmed, this would amount to illegal State aid according to the Commission.
As part of the standard procedure in State aid investigations, the European Commission will publish a non-confidential version of its preliminary decision in the Official Journal.
The opening of an in-depth investigation gives interested third parties and the Member States concerned one month from the publication date to submit their comments. It does not prejudge the outcome of the investigation.
In a press release, the Luxembourg government confirmed its position that Luxembourg did not grant illegal State aid and noted the significant tax reform implemented by the Grand Duchy in line with the EU Anti-tax Avoidance Directive and the country’s commitments under the OECD BEPS project.
There is no legal deadline for completing an in-depth investigation and its actual duration depends on many factors, including the complexity of the case, the information provided and the level of cooperation from the Member State concerned.
The European Commission will reach a final decision at the end of the formal investigation.
KPMG Luxembourg comment
From our preliminary analysis, the downward adjustment challenged by the Commission corresponds to a transfer pricing adjustment to reinstate arm’s length conditions in an intra-group context and in line with international transfer pricing guidelines. Equivalent deemed deductions are available to many taxpayers in a similar situation. Taxpayers would have been subject to the same tax basis if they had been funded by interest-bearing debt.
Selectivity (which is one of the constitutive elements of State aid) is not therefore self-evident in this specific case. The European Commission’s base of analysis remains unclear. More information will become available when the non-confidential version of this preliminary decision is published.
In addition, substantial changes have been implemented in Luxembourg. In 2015 the legal basis for (upward or downward) transfer pricing adjustments was reinforced (article 56 of the Luxembourg income tax code), and the direct tax authorities issued circular letters (in 2011 and 2016) reinforcing transfer pricing and substance requirements in the context of intragroup financing activities.
It should also be noted that the opening of an investigation does not prejudge the final outcome of such investigation.
We will keep you posted on any further developments and remain at your disposal for any question.
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