In the opinion delivered on 4 May 2023 regarding cases (i) Engie Global LNG Holding (the “Engie Group”) and Others v Commission (C-454/21 P) and (ii) Luxembourg v Commission (C-451/21 P), the Advocate General Kokott considers that Luxembourg, through tax rulings, did not grant State aid to the Engie Group in breach with the EU rules.
In this respect, the Advocate General Kokott invalidates the decision of the European Commission (the “Commission”) dated 20 June 2018 and the subsequent confirmation of the General Court of the EU (the “General Court”) dated 12 May 2021.
Background and legal context
In its decision dated 20 June 2018, the Commission recognised an illegal State aid granted to Engie Group by Luxembourg. According to the Commission’s decision, this State aid was granted in the form of tax rulings issued by the Luxembourg Tax Authorities confirming two financial transactions involving Luxembourg subsidiaries of the Engie Group.
One aspect of these tax rulings was the confirmation of different tax treatment of convertible loans granted by Luxembourg holding companies (the “Holdings”) to their respective Luxembourg subsidiary companies (the “Subsidiaries”). Indeed, at the level of the Subsidiaries (i.e. borrowers), the convertible loans were treated as debt, allowing tax deduction on any increase in their repayment obligations. At the level of the Holdings (i.e. lenders), the income derived from these convertible loans was treated - ultimately upon conversion into shares - as income from equity which was exempt under the Luxembourg participation exemption regime (Article 166 of the Luxembourg income tax law). As per the rulings, the borrowers were only taxed on a margin. However, the Commission concluded that this discrepancy in tax treatment conferred a selective advantage to Engie Group constituting an illegal State aid. According to the Commission, the selectivity of the measure resulted from the fact that an exemption was applied to income at Holdings level which economically corresponds to amounts deducted as expenses at Subsidiary level. This outcome was in contradiction with both the general objective of the tax system, which is to tax the profit of all the companies subject to tax in Luxembourg, and the objective of the participation exemption, which is to relieve double economic taxation. Furthermore, the Commission also argued that the non-application of the general anti-abuse rule as implemented in the Luxembourg tax law (Paragraph 6 of the Steueranpassungsgesetz) should also be considered as a State aid granted by Luxembourg to Engie Group.
On these bases, the Commission ordered Luxembourg to recover the aid, i.e. approximately EUR 120 million. Following an appeal lodged by Engie Group and Luxembourg, the General Court confirmed the Commission’s decision (see details here for Commission’s decision).
The Advocate General of the European Court of Justice invalidates the decision of the Commission recognising a fiscal State aid of Luxembourg for the benefit of Engie Group.
In her opinion, the Advocate General concludes that since the Commission failed to fulfil its obligation to provide all the necessary elements to demonstrate the existence of a selective advantage, the decision can be annulled in its entirety without referral back to the General Court.
In her opinion, several key points have been considered by the Advocate General:
- Tax rulings are not automatically deemed illegal State aid if they are available to all taxpayers and comply with the applicable national tax legislation. Only tax rulings that are manifestly erroneous in favour of the taxpayer might be seen as granting a selective advantage in violation of State aid law.
- In that respect, both the Commission and the General Court assumed that the Luxembourg tax law in force at the time incorporated a principle of correspondence which required the taxation of the underlying profits of the Subsidiaries for the Holdings to benefit from the participation exemption regime. However, the Advocate General argues that such correspondence is not indicated in the Luxembourg law and it cannot be constructed solely from the fact that it might be preferable.
- The review of the anti-abuse rules under State aid rules should also be reduced to a plausibility check. In this context, a manifest misapplication can only be assumed when there is no plausible explanation as to why the specific case should not be considered a matter of abuse. However, in the present case, the Commission has not established the existence of abuse of legal structural possibilities under Luxembourg law.
The Advocate General argues also that the national tax law forms the sole reference framework and the EU institutions cannot use State aid law to shape an ideal tax law.
Conclusion
The Advocate General supports Engie Group and Luxembourg in their positions. While, it is worth noting that the opinion of the Advocate General is not binding on the European Court of Justice, the courts tend to follow the Advocate General’s opinion. The final decision on this case will be taken by the Court in its judgment, which will be delivered at a later date. This is a positive development for Luxembourg and aligns with preceding case law in this matter.
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