In the Amazon and Fiat cases, rulings by the Court of Justice of the European Union (CJEU) confirmed that Luxembourg’s tax practices complied with European standards. But these recent verdicts also define an era, dating from 2015, in which the number of tax agreements negotiated in advance is significantly lower than before.

Delano’s sister publication Paperjam sat down with our tax lawyers to hear about what this new dynamic means.

Paperjam: What are the main lessons for companies from the CJEU rulings on Amazon and Fiat?

Pierre-Antoine Klethi:

The practical lessons are limited, particularly on transfer pricing, bearing in mind that these are old cases and that the tax environment has changed a lot since then. That said, the CJEU’s rulings do shed valuable light on the concept of normal taxation, against which it is assessed whether or not a given taxpayer has benefited from a selective advantage. By rejecting the idea of undue tax advantages, the court is also protecting Luxembourg’s reputation. In so doing, it can be said that these decisions strengthen legal certainty. The European Commission cannot invent its own ideal tax system based on current political guidelines, where everyone should pay their “fair share” of tax.

Has the European Commission lost any influence over taxation?

Peter Moons: 

Despite its legal setbacks, the commission has been politically successful. It took a decade to reach a legal verdict, a long period that saw major tax changes. This is testament to the effectiveness of the commission’s state aid strategy.

Pierre-Antoine Klethi: 

It’s clear that the commission, by brandishing state aid law, has used these cases to force governments to accept a number of changes and directives, such as Atad2 [Anti Tax Avoidance Directive] or those regarding exchanges of information. But the commission doesn’t have that “stick” anymore, and I think it’s no coincidence that it’s now finding it much harder to push through its initiatives, Atad3 and others.

How useful are the rulings on Amazon and Fiat for the Luxembourg tax authorities?

Pierre-Antoine Klethi:

These rulings clarify the line to be followed by the tax authorities by dispelling previous uncertainties. They should make it possible to adopt a more assertive approach to various tax issues.

In terms of rulings, how has the practice of the Luxembourg tax authorities changed since the commission’s offensive?

Pierre-Antoine Klethi:

In fact, since the commission intervened against Fiat Chrysler in 2015, the number of rulings has fallen significantly. This has resulted in an increase in litigation to resolve differences of opinion that were previously prevented by advance rulings.

How do you explain the increase in litigation?

Peter Moons:

One indication that both the number of cases and their complexity are increasing is that the Administrative Court created a fifth chamber last September to specialise in tax cases. Three judges now focus specifically on this subject.

Pierre-Antoine Klethi:

Another indication is the lengthening of procedural deadlines. At the moment, we often have 18 months between the end of the written procedure and the oral hearing--which is an extremely long time. What’s more, the cases brought before the courts are just the tip of the iceberg. Although the number of rulings and judgements, just over 200 a year, is stable, the number of questions from tax authorities is rising.

For example?

Pierre-Antoine Klethi:

There are more and more questions about permanent establishments (fixed places of business) abroad and transfer pricing (prices at which companies in the same group exchange goods, assets or services). In November 2023, an important ruling clarified the application of transfer pricing rules, confirming the right to deduct notional interest for interest-free loans, and thus defining a clearer distinction between equity and debt.

To what extent is this trend (towards more and more tax disputes) affecting Luxembourg’s reputation as a financial centre?

Pierre-Antoine Klethi:

The increase in these disputes is helping to normalise the perception of Luxembourg by dispelling suspicions of tax complacency. However, the administration’s questioning of sometimes longstanding structures and the lack of dialogue when views differ could also damage the country’s reputation. Asking questions is fine, but closing up like an oyster at the first disagreement is problematic. The absence of a settlement procedure is sometimes felt.

What advice would you give to companies to minimise the risk of disputes with the Luxembourg tax authorities?

Pierre-Antoine Klethi:

I would advise companies to maintain transparency and engage in constructive dialogue with the tax authorities. Accurate documentation and solid justification of their tax positions are key preventive measures against litigation.

Peter Moons:

Companies must also anticipate questions from the tax authorities and respond with detailed transfer pricing documentation. If the case goes to court, it will often rule in favour of the report containing the best details.

This article was first published by Delano.