Factual background

The European Commission investigated two Luxembourg financing structures set up by ENGIE. The tax rulings confirmed the deductibility of accrued, but unpaid, charges connected with a convertible loan, without (corresponding) taxable income at the level of the holder of the convertible loan. Upon conversion of the loan into shares, there was no taxation at the level of the holder of the conversion shares, nor at the level of the parent entity to whom these shares were transferred pursuant to a prepaid forward agreement. Subsequently, the parent benefited from the participation exemption regime with respect to income and gains in relation to such shares.

The European Commission considered that the resulting “deduction without inclusion” outcome was not in line with Luxembourg tax rules and that ENGIE had received a selective advantage:

  • In a first line of reasoning, the European Commission claimed that Luxembourg law did not permit to deduct expenses to the extent they give rise to a corresponding exempt income at the level of the recipient (or, conversely, to exempt income that gave rise to a corresponding deduction at the level of the payer). As a result, the parent entities that were not taxed on the income from the conversion shares had received an unlawful selective advantage.
  • In a second line of reasoning, which resembles to a large extent the first one, the European Commission sought to demonstrate a selective advantage at group level.
  • In a third line of reasoning, the European Commission argued that Luxembourg should have applied its general anti-abuse rule to reject the ruling requests and prevent the selective advantage.

EU General Court’s judgment

The General Court, after confirming again that the European Commission is entitled to review tax rulings under State aid rules and that such review does not entail hidden tax harmonisation, validated the different lines of reasoning:

  • On the first two lines, the General Court agreed to taking an economic approach to assess the arrangement as a whole, rather than as separate (albeit related) transactions. The General Court then validated the European Commission’s point that Luxembourg law normally does not allow exempting income if the corresponding charge was deductible at payer’s level.
  • In addition, the General Court also upheld the European Commission’s claim that the arrangement was abusive under the Luxembourg general anti-abuse rule, so that the Luxembourg tax authorities should have rejected the tax treatment approved in the various rulings.

Impact on other taxpayers

Contrary to the other recent State aid cases concerning tax rulings which the General Court had to address, the ENGIE case is not about transfer pricing but introduces a new line of attack of the European Commission: the non-application of a general anti-abuse rule. The upholding of this argument may have an impact on the margin of appreciation of EU tax authorities in applying domestic anti-abuse rules.

The confirmation of the economic approach to “pierce the veil” of separate related transactions is also a very relevant element, albeit the reasoning is debatable and in our view requires relying on abuse of law considerations in order to ignore actual transactions.

Taxpayers that used a similar structure should take the judgment into account in the context of State aid risk assessments (e.g., as part of FIN48 analyses), noting that in State aid matters the recovery period can go 10 years backwards as from the moment the European Commission has started looking at an individual case or a (potential) State aid regime.

Next steps

ENGIE and Luxembourg may appeal the judgment on matters of law before the Court of Justice. Arguments could include questioning the European Commission’s entitlement to substitute its appreciation of the abuse of law criteria to the appreciation of the Luxembourg tax authorities, and also raising a potential misunderstanding of Luxembourg’s tax rules.

Other pending State aid cases concerning tax rulings

The Fiat case, in which Fiat seeks in a final appeal to overturn a finding that it received unlawful State aid from Luxembourg, is pending before the Court of Justice. The hearing took place on 10 May 2021, and the date of the judgment is not yet known.

The European Commission’s appeals against the General Court’s July 2020 judgment in favour of Apple and Ireland and January 2019 judgment in favour of Belgium (in the excess profit ruling case) are also pending before the Court of Justice.

Next to the ENGIE judgment, the General Court issued on 12 May 2021 its judgment in the Amazon case, in which it annulled the European Commission’s finding that Luxembourg had granted unlawful State aid to a Luxembourg operating entity of the Amazon group. For more information on this judgment, please click here.

In addition, several cases are still in the phase of formal State aid investigation by the European Commission, notably Huhtamäki (Luxembourg), Inter Ikea (the Netherlands), Nike (the Netherlands) and 39 beneficiaries of individual excess profit rulings (Belgium). More investigations may still be opened.

We will keep you informed about further developments. Should you have any question, please contact a member of our EU State aid team or your trusted Loyens & Loeff adviser.