The “tax rulings” mechanism – commentary on the CJEU decision of May 12, 2021

On May 12, 2021, the CJEU handed down two rulings in the context of the “Tax rulings” granted by Luxembourg. The verdict was not similar. The tax ruling granted by Luxembourg to Engie was deemed incompatible with European law, while that granted to Amazon was not considered to be state aid.

A tax ruling, also known as an advance tax ruling (ATR), is an agreement given by the tax authorities to a proposed tax structuring, analyzed and interpreted in the light of national and European law, prior to a tax declaration. The tax rescript procedure is used to obtain a position from the tax authorities on the application of a tax law to a particular situation, in order to provide legal certainty.

The problem raised in the Engie ruling is that the DFAs granted were taxable only at subsidiary level on a margin agreed with the tax authorities. The European Commission found that in Luxembourg, virtually all the profits of subsidiaries were not taxed, even though this constituted state aid that had to be repaid. In the Court’s view, the European Commission was well within its remit in carrying out an audit, and only carried out an assessment of “so-called ‘normal’ taxation, as defined by Luxembourg tax law as applied by the Luxembourg tax authorities”. He believes that the Commission’s assessment that ” a parent company’s exemption of income from participating interests depends on its subsidiary’s taxation of the profits distributed by the latter “. It is clear that ” the Luxembourg tax authorities have departed from the reference framework by confirming the exemption at holding company level of income from holdings which correspond, from an economic point of view, to an amount which has been deducted, as part of a corporate and financial set-up, as expenses at subsidiary level “.

Whereas for Amazon, in 2017, the European Commission considered that this DFA constituted state aid. In fact, it considered that the royalty payable by LuxOpCo to LuxSCS via the calculation method approved by the administration was too high, thereby artificially lowering the tax base. The Court concluded that the main arguments put forward by the Commission did not make it possible to establish that LuxOpCo’s tax burden had been artificially reduced as a result of an overvaluation of the royalty. The decision is therefore that none of the findings set out by the Commission in the contested decision is sufficient to demonstrate the existence of an advantage within the meaning of Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), so that it should be annulled in its entirety.