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Luxembourg: EC state aid investigation, tax rulings granted Finnish-headquartered company

Luxembourg: EC state aid investigation

The European Commission today announced it has opened an in-depth investigation to examine whether tax rulings granted by Luxembourg to a food and drink packaging company headquartered in Finland may have given the company an unfair advantage over its competitors, in breach of EU state aid rules.

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As explained in an EC release, the investigation concerns three tax rulings issued by Luxembourg to a Luxembourg-based company of the multinational group entity that is headquartered in Finland.

  • The Luxembourg company carries out intra-group financing activities, and receives interest-free loans from another company of the multinational group based in Ireland. These funds are then used by the Luxembourg company to finance other group companies through interest-bearing loans.
  • The three tax rulings issued by Luxembourg allow the Luxembourg company to unilaterally deduct from its taxable basefictitious interest payments” for the interest-free loans it receives. According to Luxembourg, these fictitious expenses correspond to interest payments that an independent third party in the market would have demanded for the loans that the Luxembourg company receives. However, the Luxembourg company does not pay interest. These deductions reduce the Luxembourg company's taxable base and, as a result, the company is taxed on a substantially smaller profit.

The EC release further notes that at this stage, the EC has doubts that this tax treatment, as endorsed in the Luxembourg tax rulings, can be justified. The EC’s concerns are that Luxembourg has accepted a unilateral downward adjustment of the Luxembourg company’s taxable base that may grant the company a selective advantage. In turn, this would allow the group to pay less tax than other stand-alone or group companies that have transactions priced in accordance with market terms. If confirmed, this would be “illegal state aid.”
 

Read a March 2019 report prepared by KPMG’s EU Tax Centre
 

Read a March 2019 report prepared by the KPMG member firm in Luxembourg

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