Tax rulings on transfer pricing may violate EU State aid rules

Publication December 2015


The enforcement of EU State aid rules in relation to tax rulings is a key priority for the EU’s Directorate-General for Competition (DG COMPETITION) under Commissioner Vestager. Most recently, DG COMPETITION announced on December 3, 2015 that it has opened an in-depth investigation into rulings by the Luxembourg tax authorities with regard to McDonald’s corporate income tax.1 The McDonald’s investigation is the sixth such case. The Commission has opened four other investigations into alleged aid to specific companies – Amazon, Apple, Fiat Finance and Trade (FFT), and Starbucks – and one into potential aid granted under the Belgian ”excess profit” tax regime.2

The Commission has already adopted negative decisions finding that Luxembourg and Dutch rulings in favor of FFT and Starbucks, respectively, amounted to illegal State aid and ordering the Member States concerned to recover the unpaid tax from FFT and Starbucks.3 Investigations in the other three cases are still ongoing, but the Commission is expected to issue additional decisions soon. With the exception of the recent McDonald’s case, all of these investigations relate to intra-group tax arrangements, but they concern a variety of intra-group transactional practices, from purchases and sales of goods, to intra-group lending arrangements, to intellectual property licensing.

The Commission’s use of EU State aid rules to investigate tax ruling practices is highly controversial, and legal challenges to the Commission’s position are likely to run for years. Meanwhile, however, the Commission’s aggressive challenges to well-established tax planning practices will likely impact multinationals in activities ranging from internal tax structuring to merger and acquisition planning. Many multinationals will also want to review their existing tax rulings and structuring in light of the Commission’s positions.

The Commission’s State aid investigations reflect a more general increased focus on taxation in the current Commission. The Commission is also conducting a wider inquiry into certain tax practices of several Member States, which in December 2014 was extended to all Member States. In June 2015, the Commission unveiled a series of initiatives to tackle tax avoidance, secure sustainable tax revenues and strengthen the Single Market for businesses. The proposed measures, which are part of the Commission’s Action Plan for fair and effective taxation,4 aim to significantly improve the corporate tax environment in the EU, making it fairer, more efficient and more growth-friendly. In addition, in October 2015, the Member States unanimously agreed to the automatic exchange of information on their tax rulings as of 1 January 2017.5


Although the Commission has no direct authority over national tax systems, it can investigate whether certain fiscal regimes, including in the form of tax rulings, would constitute “unjustifiable” State aid to companies. The EU’s State aid rules are set out in the Treaty on the Functioning of the European Union (TFEU) and constitute part of the TFEU’s provisions on competition law. In general, Member States are prohibited from granting financial assistance in a way that distorts competition, unless the aid measure has been notified to and authorized by the Commission. The prohibition applies to any form of financial aid, including in the form of tax rulings. Although not problematic in themselves, tax rulings may amount to unlawful State aid if they provide selective advantages to a specific company or group of companies that are not approved under EU State aid rules.

Article 108(3) TFEU requires Member States to notify non-exempted State aid measures, including in the form of tax measures, to the Commission before their implementation, and to await the Commission’s approval before implementing such measures (the so-called “standstill obligation”). If either of those obligations is not fulfilled, the State aid measure is considered to be unlawful.

A notification triggers a preliminary investigation by the Commission. The Commission can also investigate unnotified State aid that has already been granted on its own initiative or following a third-party complaint. If, following an in-depth investigation, the Commission finds that a measure constitutes illegal State aid, the Commission will require the Member State to recover the aid from the beneficiary (unless such recovery would be contrary to a general principle of EU law). In the case of tax measures, the amount to be covered is calculated “on the basis of a comparison between the tax actually paid and the amount that should have been paid if the generally applicable rule had been applied”. Interest is added to this basic amount. Recovery of past benefits can be ordered for up to ten years.

In the FFT and Starbucks cases, the Commission confirmed that the contested tax rulings had granted selective tax advantages to the companies that artificially lowered their payable taxes in breach of EU State aid rules. In particular, the Commission found that the contested rulings endorsed artificial and complex methods to establish taxable profits, which did not reflect market reality. As a result, the Commission ordered Luxembourg and the Netherlands to recover the unpaid tax from FFT and Starbucks, respectively, to remove the unfair competitive advantage they have enjoyed and restore equal treatment with other companies in similar situations. The amounts to recover are $20-30 million for each company, although the precise amounts will be determined by the Luxembourg and Dutch tax authorities on the basis of the methodology established by the Commission.

When can tax rulings constitute unlawful state aid?

Article 107(1) TFEU prohibits “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it affects trade between Member States.”

Measures taken to exempt a company from an obligation to pay taxes can amount to unlawful State aid if the following conditions are met:

  • First, the tax measure must grant an economic advantage. In the case of tax rulings, an advantage will in principle exist where the tax payable under the tax ruling is lower than the tax that would otherwise have to be paid under the normally applicable tax system. The general rule is that the allocation of profit between companies of the same corporate group must comply with the “arm’s length principle” as set in Article 9 of the OECD Model Tax convention. In the case of transfer pricing agreements, this means that arrangements between companies of the same corporate group must not depart from arrangements that a prudent independent operator acting under normal market conditions would have accepted. The Court of Justice of the European Union has confirmed that if the method of taxation for intra-group transfers does not comply with the arm’s-length principle and leads to a lower taxable base than would result from a correct implementation of that principle, it provides a selective advantage to the company concerned.6
  • Second, the advantage must be financed through State resources. In cases where a tax authority lowers the effective tax rate that would otherwise be payable, the resulting loss of revenue for the State is equivalent to the use of State resources.
  • Third, the tax measure must distort or threaten to distort trade and competition between Member States. Where the beneficiary carries out an economic activity in the EU, this criterion is easily met.
  • Finally, the tax measure must be specific or selective in that it benefits “certain undertakings or the production of certain goods”. According to the Commission, “every decision of the administration that departs from the general tax rules to the benefit of individual undertakings in principle leads to a presumption of State aid and must be analysed in detail.7 Thus, a tax ruling that merely interprets general tax rules or manages tax revenue based on objective criteria will generally not constitute State aid, while a ruling that applies the authorities’ discretion to apply a lower effective tax rate than would otherwise apply may amount to State aid. In the case of transfer pricing agreements, a tax ruling that deviates from the arm’s-length principle is likely to be considered specific and hence qualify as State aid under EU law. In the McDonald’s case, which does not involve taxation of intra-group transactions, the Commission is seeking to determine whether the tax rulings granted by the Luxembourg authorities were more favorable to McDonald’s than the authorities’ approach to other similarly situated companies.

The classification of a tax benefit as general or specific is therefore crucial to determine its validity. Even a measure that appears prima facie to be general may be selective in practice. Thus, in the Gibraltar case,8 a corporate tax reform for companies operating in Gibraltar was found to be selective because it favoured off-shore companies, even though it appeared to be applicable to all undertakings domiciled in Gibraltar. The ECJ ruled that “the fact that offshore companies are not taxed is… the inevitable consequence of the fact that the bases of assessment are specifically designed so that offshore companies, which by their nature have no employees and do not occupy business premises, have no tax base under the bases of assessment adopted in the proposed tax reform.”9

If one of the tax measures in question constitutes State aid, it could in principle benefit from an exemption under the TFEU, but such exemptions generally apply to tax relief granted for a specific project, such as investing in disadvantaged areas or promoting culture and heritage conservation, and are limited to the costs of carrying out such projects.


The Commission’s launch of a new investigation into tax ruling practices under the EU State aid rules confirms that this area remains an enforcement priority for the current Commission. Indeed, since the newly launched McDonald’s investigation is the first not to involve intra-group taxation, the Commission appears to be broadening its focus in this area. Although the Commission has so far only reached decisions in the FFT and Starbucks cases, further decisions in the near future seem likely.

The Commission’s investigations and decisions serve as a reminder to all companies that tax rulings, while not as such problematic, may amount to unlawful State aid if they provide selective advantages to a specific company or group of companies that are not compatible with EU State aid rules. Companies that have benefited from tax rulings or other special tax measures are, therefore, advised to assess the possibility that tax benefits negotiated as part of their European tax planning may constitute unlawful State aid.

More generally, companies are reminded to take account not only of the applicable tax rules as part of their global tax planning and negotiation of tax rulings, but also of potential State aid considerations.

Finally, for companies considering an investment into or acquisition in a European country, State aid implications should be taken into account when undertaking tax due diligence and particular care should be taken when drafting tax indemnity provisions to ensure that potential losses arising from negative State aid decisions are covered.



6See Joined Cases C- 182/03 and C-217/03 Belgium and Forum 187 v. Commission [2006] ECR I-5479, para. 97.


Commission Notice on the application of State aid rules to measures relating to direct business taxation, JO 1998, C 384/3 (Tax Notice), para. 22.


Cases C-106/09 P and C-107/09 P, Commission and Kingdom of Spain v Gibraltar and United Kingdom, [2011] ECR I-11113.


Ibid, para. 106.

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