On 24 September 2019, the General Court of the European Union ("Court") ruled on the joined cases T-760/15 and T-636/16 (Starbucks) and the joined cases T-755/15 and T-759/15 (Fiat Chrysler).
Both cases are complex and contain novel considerations. In this Tax Alert we provide you with a first summary of both cases and some preliminary observations.
1. Key legal considerations in both joined cases
In both joined cases the European Commission ("EC") essentially took the position that the tax rulings issued by the Dutch (Starbucks) and Luxembourg (Fiat Chrysler) tax authorities in which they approved a certain transfer pricing approach resulting in an alleged at arm's length remuneration, resulted in State aid incompatible with the Internal Market.
In the decisions of the EC leading to both cases, the EC took an unprecedented - and since much debated - position. The EC principally argued that the tax rulings conferred a selective advantage on the taxpayer with regard to the general national corporate income tax system, because the tax rulings did not comply with the arm’s length principle. According to the EC this necessarily formed part of its assessment under Article 107(1) TFEU of tax measures granted to group companies, independently of whether a Member State had incorporated that principle into its national legal system, and according to which intra-group transactions should have been remunerated as if they had been negotiated between independent undertakings.
In both cases, the Court confirms the position by the EC by reasoning that if a member states' national tax law does not make a distinction between integrated undertakings (an undertaking part of a group) and standalone undertakings, that law is intended to tax the profit arising from the economic activity of such an integrated undertaking as though it had arisen from transactions carried out at market prices. In that case, the EC may compare the fiscal burden of an integrated undertaking resulting from the application of a fiscal measure with the fiscal burden of a stand-alone undertaking in a comparable factual situation, carrying on its activities under market conditions. In that context, Article 107(1) TFEU allows the EC to check whether the pricing of integrated undertakings correspond to the pricing under market conditions in order to determine whether a (selective) advantage may have been granted to that integrated undertaking. The arm’s length principle, as applied by the EC in the context of Article 107(1) TFEU, is thus an instrument or benchmark for making that comparison.
The Starbucks case dealt with a tax ruling issued by the Dutch tax authorities in relation to the profit calculation of Starbucks Manufacturing EMEA BV ("Starbucks BV") with regard to the at arm’s length remuneration for the intra-group production and distribution of roasted coffee beans and the remuneration for the use of the groups’ roasting intellectual property. The Court ruled that the EC did not suffice in demonstrating that the ruling conferred a selective economic advantage on Starbucks BV.
The Fiat Chrysler case dealt with a tax ruling issued by the Luxembourg tax authorities in relation to the remuneration of the financing activities of Fiat Finance and Trade Ltd ("FFT"). The Court rejected all actions of FFT, Luxembourg and Ireland and agreed to the EC's conclusion that State aid had been granted.
2. Initial response of the EC and the Dutch government
Upon the release of Starbucks and Fiat Chrysler cases EU Commissioner Vestager issued a press release. The Dutch government also issued a first response to the Starbucks decision. Commissioner Vestager: "The judgments confirm that, while Member States have exclusive competence in determining their laws concerning direct taxation, they must do so in respect of EU law, including State aid rules. Furthermore, the General Court has also confirmed the Commission's approach to assess whether a measure is selective and if transactions between group companies give rise to an advantage under EU State aid rules based on the so-called arm's length principle."
In its press release the Dutch government welcomes the Court’s conclusions that there is no State aid in the Starbucks case. The response however also expresses that the Court did agree with the EC on a point of principle: "In the case of Starbucks, the Netherlands lodged its action in 2015 because the European Commission based its ruling that state aid had been provided on an arm’s length principle that does not exist in EU law. The Netherlands argued before the General Court that this assessment must be made on the basis of national law. Our national law on this point is based on the OECD guidelines. It seems that the General Court did not rule in the Netherlands’ favour on this point. Nevertheless, it found that no state aid has been provided because an arm’s length price was agreed in the tax ruling, as a result of which Starbucks was treated no differently than similar companies."
Parties have the possibility to appeal to the Court of Justice of the European Union ("CJEU") against these judgements of the Court.
3. Our preliminary observations
The EC has expressed on several occasions that tax rulings as such are not considered in breach with EU State aid rules, if the rulings “simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation." However, State aid is granted, if the ruling provides the taxpayer with a selective economic advantage, for example via the endorsement of an incorrect transfer pricing method, effectively resulting in a lower amount of tax payable. The EC has also stated that it does not expect to encounter ‘systematic irregularities’ in the Netherlands’ tax rulings.
As to the Starbucks and Fiat Chrysler cases at hand, a preliminary take away seems to be:
• the Court as a starting point argues that if a member states' national tax law does not make a distinction between integrated undertakings and standalone undertakings, that law is intended to tax the profit arising from the economic activity of such a group company as though it had arisen from transactions carried out at market prices. In that case, the EC may compare the fiscal burden of an integrated undertaking resulting from the application of a fiscal measure with the fiscal burden of a stand-alone undertaking in a comparable factual situation, carrying on its activities under market conditions. In that context, Article 107 (1) TFEU allows the EC to check whether the pricing of integrated undertakings correspond to the pricing under market conditions in order to determine whether a (selective) advantage may have been granted to that integrated undertaking. The arm’s length principle is thus an instrument or benchmark for making that comparison;
• to justify its comparison between integrated undertakings and standalone undertakings, the Court derived from national tax legislation that both undertakings are treated equally. This raises the question what the view of the Court will be in other cases, for example in the Apple case (see European Commission's decision of 30 August 2016 on State aid SA.38373), that are still pending for the Court.
The precise meaning and impact of both judgements (on other pending state aid cases in relation to tax rulings, such as Nike and Ikea) however must be further analysed.
Please contact your Stibbe tax lawyer for more detailed information or the discuss the possible implications of this decision.