Luxembourg: Tax rulings granted to companies resulted in tax advantage (EU General Court)

Judgments finding that a tax advantage had been provided in tax rulings issued by Luxembourg to taxpayer companies

Tax rulings granted to companies resulted in tax advantage

The General Court of the European Union today issued judgments finding that a tax advantage had been provided in tax rulings issued by Luxembourg to the taxpayer companies.

The General Court held that the preferential tax treatment was predominantly the result of the non-application of a national measure relating to abuse of law.

The cases are: Luxembourg v. Commission, T-516/18 (12 May 2021) and Engie, Engie Global LGN Holdings Sarl, and Engie Investment International SA v. Commission, T-525/18 (12 May 2021)

Summary

As briefly explained in a release [PDF 251 KB] from the General Court, Luxembourg tax authorities between 2008 and 2014 adopted two sets of tax rulings in connection with intra-group financing structures relating to the transfer of activities between companies of the taxpayer group resident in Luxembourg. In general, the transactions conducted under each structure were implemented in three steps.

  • First, a holding company transferred shares to a subsidiary.
  • Second, in order to finance the shares transferred, that subsidiary took out an interest-free mandatorily convertible loan (ZORA) with an intermediary. Besides the fact that the loan granted generates no periodic interest, the subsidiary that received the ZORA repaid the loan, upon its conversion, by issuing shares in an amount equal to the nominal amount of the loan, plus a premium representing the profits made by the subsidiary during the term of the loan (ZORA accretions).
  • Third, the intermediary financed the loan granted to the subsidiary by entering into a prepaid forward sale contract with the holding company under which the holding company paid to the intermediary an amount equal to the nominal amount of the loan in exchange for the acquisition of the rights to the shares that the subsidiary was to issue on conversion of the ZORA.

Therefore, if the subsidiary made profits during the life of the ZORA, the holding company would own the right to all the shares issued that would incorporate the value of any profits made as well as the nominal amount of the loan.

These structures were endorsed by tax rulings issued by the Luxembourg tax authorities. For tax purposes, under the tax rulings, only the subsidiary was taxed on a margin agreed with the Luxembourg tax administration.

The EC determined that the result of the structures approved by the tax administration was that almost all of the profits made by the subsidiaries established in Luxembourg were not taxed. The EC concluded that the tax rulings constituted illegal State aid that was incompatible with the internal Market (that must be recovered from the taxpayers by the Luxembourg authorities).

The taxpayers and the Luxembourg tax authorities initiated a judicial action before the General Court of the European Union which today issued a judgment approving the EC’s approach that when presented with a complex intra-group financing structure, this requires examining the “economic and fiscal reality”—rather than a formalistic approach that considered, in isolation, each of the transactions under the structure.

In addition, the General Court concluded that the EC correctly determined that a selective advantage was conferred as a result of the non-application of national provisions relating to abuse of law.

 

 

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