On 8 June 2023, Advocate General (“AG”) Juliane Kokott of the Court of Justice of the EU (“CJEU”) delivered her opinion in case C-457/21 P (the “Opinion”), concerning a tax ruling granted in 2003 (the “Tax Ruling”) by the Luxembourg tax authorities (“LTA”) to Amazon in relation to its intellectual property licencing structure and considered as State aid by the European Commission (“EC”).
According to the AG the EC did not rely on the correct reference framework for its review of a selective advantage and on that basis, the appeal is unfounded. In addition, AG Kokott proposed a restricted standard of review to assess the presence of a selective advantage.
Background to the EC State aid decision
The Luxembourg structure involved a Luxembourg limited partnership (“LuxSCS”) held by US entities and a Luxembourg private limited liability company (“LuxOpCo”) entirely held by LuxSCS. The latter held intangible assets licensed to LuxOpCo.
The Tax Ruling, supported by a transfer pricing analysis, notably confirmed the calculation method of the annual tax-deductible royalty payable by LuxOpCo to LuxSCS and the arm’s length remuneration to be retained by LuxOpCo.
On 4 October 2017, the EC decided that Luxembourg granted State aid to Amazon through the Tax Ruling as the transfer pricing agreement was inconsistent with the OECD transfer pricing guidelines (“OECD TPG”) and LuxOpCo’s tax base was unduly reduced resulting in an individual selective advantage.
On 12 May 2021, the General Court of the EU (the “GCEU”) annulled the EC’s decision considering that it did not demonstrate the existence of an advantage. The EC filed an appeal.
AG Kokott's Opinion in favour of annulling the EC’s decision
The AG started with restating the correct reference system. Per the Opinion, the EC’s decision is to be annulled, as it did not rely on applicable Luxembourg law and relevant administrative practice. By “basing its review of the appropriate amount of the royalty exclusively on the OECD Transfer Pricing Guidelines from 1995, 2010 and even 2017, the Commission as a result applied a different arm’s length principle from that established in Luxembourg law – as it had done before, in Fiat Chrysler Finance Europe v Commission” (Point 73).
Should the CJEU follow the reference system set by the EC, AG Kokott puts forward a restricted standard of review in the selectivity analysis for individual tax assessments (including tax rulings). The approach builds on (i) the fiscal autonomy of EU Member States, (ii) the threshold set by the CJEU to scrutinize compliance of Member States’ general taxation decisions with regards to State aid (“manifestly discriminatory with the aim of circumventing the requirements of EU law on State aid”) and (iii) the CJEU position in the Fiat Chrysler Finance Europe case that “any fixing of the methods and criteria for determining an ‘arm’s length’ outcome falls within the discretion of the Member States”.
Based on this line of reasoning, “not every incorrect tax ruling but only those which are manifestly erroneous in favour of the taxpayer constitute a selective advantage. Derogations from the applicable national reference system are manifestly erroneous if they cannot be plausibly explained to a third party, such as the Commission or the Courts of the European Union, and are therefore equally evident to the taxpayer concerned” (Point 94).
The Opinion continues that only “the manifest derogation in favour of the taxpayer of a tax ruling (or tax assessment) from the reference system can constitute a selective advantage” (Point 96). The focus is not on which method should have been applied but whether the method applied in the Tax Ruling was manifestly incorrect which, in the AG’s view, was not the case.
Conclusion
The notable addition of this Opinion is the definition of the standard of review the EC must apply (also raised in the opinion given in Luxembourg v Commission and Engie Global LNG Holding and Others v Commission, C-454/21 P and C-451/21 P), setting a limit to the EC’s intervention in Member States’ tax autonomy through State aid.
Share on
