Luxembourg: Tax rulings provided no selective advantage (EU General Court)

Tax rulings issued by Luxembourg to the taxpayer subsidiary did not provide a selective advantage that was incompatible with the EU internal market.

The judgment annuls a decision of the European Commission.

The General Court of the European Union today issued a judgment in favour of a Luxembourg subsidiary of a multinational group, holding that tax rulings issued by Luxembourg to the taxpayer subsidiary did not provide a selective advantage that was incompatible with the EU internal market.

According to the General Court, the EC did not satisfy the requisite legal standard that there was an undue reduction of the tax burden of a European subsidiary of the taxpayer group.

The judgment annuls a decision of the European Commission.

The cases are: Luxembourg v. Commission, T-816/17 and T-318/18 (12 May 2021)

Read a release [PDF 257 KB] from the General Court

Summary

Beginning from 2006, the taxpayer group pursued its commercial activities in Europe through two companies established in Luxembourg:

  • LuxSCS—a Luxembourg limited partnership, the partners of which were U.S. entities of the taxpayer group
  • LuxOpCo—a wholly owned subsidiary of LuxSCS

Between 2006 and 2014, LuxSCS held the intangible assets necessary for the taxpayer group’s activities in Europe and it concluded various agreements with U.S. entities of the group, namely license and assignment agreements for pre-existing intellectual property with a related entity (the buy-in agreements) and an agreement for the sharing of costs linked to the development of those intangible assets (the cost-sharing agreement) with the related entity and a second entity.

  • Under those agreements, LuxSCS obtained the right to exploit certain intellectual property rights, consisting essentially of technology, customer data, and trade marks and to sub-license those intangible assets. On that basis, LuxSCS concluded a license agreement with LuxOpCo, as the principle operator of the taxpayer group’s business in Europe. Under that agreement, LuxOpCo undertook to pay a royalty to LuxSCS in return for the use of the intangible assets.
  • The Luxembourg tax authorities in November 2003 granted a tax ruling confirming the treatment of LuxOpCo and LuxSCS for the purposes of Luxembourg corporate income tax. Regarding the determination of LuxOpCo’s annual taxable income, the taxpayer group had proposed that the “arm’s length” royalty to be paid by LuxOpCo to LuxSCS would be calculated according to the transactional net margin method (TNMM), using LuxOpCo as the tested party. The tax ruling:
    • Confirmed that LuxSCS was not subject to Luxembourg corporate income tax because of its legal form, and
    • Endorsed the method of calculating the annual royalty to be paid by LuxOpCo to LuxSCS under the license agreement
  • The EC in 2017 found that, in so far as it had endorsed the “arm’s length” nature of the method of calculating the royalty to be paid by LuxOpCo to LuxSCS, that tax ruling, and its annual implementation from 2006 to 2014, constituted State aid that was incompatible with the internal market. The EC found that since the tax ruling had been implemented by Luxembourg without prior notification to the EC in advance, the EC ordered the recovery, from LuxOpCo, of the aid that was deemed to be unlawful and incompatible with the internal market.
  • Luxembourg and the taxpayer group each brought an action before the General Court seeking the annulment of the EC decision.

In its judgment delivered today, the General Court of the European Union generally upheld the arguments contesting both the primary and subsidiary findings of an advantage and consequently annulled the contested decision in its entirety.

The judgment of the General Court provides clarifications as regards the scope of the EC’s burden of proof in establishing the existence of an advantage when the level of taxable income of an integrated company belonging to a group is determined by the choice of transfer pricing method. 

 

 

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