Netherlands: Formal investigation of tax rulings, transfer pricing issues (EU General Court)

Taxpayer challenges to a determination by the European Commission to initiate a formal investigation procedure with regard to tax rulings

Taxpayer challenges to a determination by the European Commission

The General Court of the European Union today dismissed taxpayer challenges to a determination by the European Commission to initiate a formal investigation procedure with regard to tax rulings issued by the Dutch tax administration.

The case is: Nike European Operations Netherlands and Converse Netherlands v. Commission, Case T-648/19 (14 July 2021)


As explained in today’s release [PDF 244 KB] from the General Court, the Dutch tax administration issued tax rulings to Dutch subsidiaries of holding companies ultimately owned by U.S. corporations.

The Dutch tax rulings validated, for tax purposes, a transfer pricing arrangement and in particular the level of royalties paid to other group companies (not taxed in the Netherlands) for the use of intellectual property rights. The royalties were tax deductible from the taxable revenue of subsidiaries in the Netherlands.

According to a provisional assessment by the EC, the tax rulings conferred a “selective advantage” because the corporate income tax for the taxpayer subsidiaries was calculated on the basis of a lower annual level of profit than it would have been if those companies’ intra-group transactions had been priced at arm’s length for tax purposes. Further, it was asserted the amount of royalties did not correspond to the amount that would have been negotiated under market conditions for a comparable transaction between independent companies.

Thus, the EC decided to open a formal investigation procedure to determine whether there might be any unlawful state aid. The subsidiaries asked the General Court of the European Union to annul the EC’s decision for a formal investigation.

Today, the General Court rejected the taxpayer subsidiaries’ arguments and dismissed the action.

As regards the argument that the tax rulings at issue were merely declaratory in nature and did not constitute a prerequisite for operating in the Netherlands or for using the arm’s length principle, the General Court turned to the relevant case-law. The General Court noted that it was appropriate for the EC to compare the taxable profit of the recipients of the tax rulings against an undertaking in a factually comparable situation and that conducted its activities in conditions of free competition. Against that background, although for a given intra-group transaction, a certain level of pricing was accepted by the tax rulings, the General Court found it was necessary to verify whether that pricing corresponded to prices that would have been charged under market conditions.

The taxpayer subsidiaries asserted that the EC should have extended its preliminary examination to include the situation of companies for whom some 98 tax rulings similar to those at issue were addressed, or the situation of some 700 companies that were using a company structure similar to that of the taxpayer.

The General Court, however, found that the EC had satisfied its obligation to initiate the formal investigation procedure and did so without “manifest errors of assessment.” Thus, the General Court concluded that the initiation of the formal investigation procedure could not reasonably be challenged. 



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