Factual background 

The case concerned the arm’s length nature of a royalty paid by a Luxembourg operating company (LuxOpCo) to a Luxembourg partnership (LuxSCS) – a tax transparent entity in Luxembourg – for the use of certain intangibles (technology, marketing-related intangibles and customer data).

In a 2003 tax ruling, the Luxembourg tax authorities had confirmed the arm’s length nature of the deductible royalty payments. The supporting transfer pricing analysis applied the transactional net margin method (TNMM), a one-sided transfer pricing method, with LuxOpCo as tested party. Hence, it determined an arm’s length remuneration for LuxOpCo and any business income in excess of that remuneration served to pay the royalty.

The European Commission disagreed and considered that LuxOpCo’s tax base was unduly reduced. The General Court in turn found errors of facts and law in the European Commission’s analysis and annulled the European Commission’s decision. For further background, we refer to our tax flash of 12 May 2021.

The CJEU judgement

The CJEU upholds the General Court’s conclusions albeit on different grounds. In line with its landmark Fiat judgment of November 2022, the CJEU considered that the OECD transfer pricing guidelines could not form part of the “reference framework”, i.e., normal taxation in Luxembourg against which a selective advantage is tested, because Luxembourg law did not explicitly refer to and implement these guidelines. Thus, the decision of the European Commission was vitiated by a fundamental error.

The CJEU decided that, although the General Court also relied on a wrong reference framework, it had reached the correct outcome. The CJEU thus decided to directly rule in final instance and confirm the annulment of the European Commission’s decision.

Impact on other cases and tax payers

This judgment is in line with prior ones in the Fiat and ENGIE cases in confirming that the European Commission cannot seek to enforce non-binding OECD transfer pricing guidelines instead of looking at the national legal implementation of the arm’s length principle. These guidelines may, however, be relevant if effectively referred to in the national legal framework.

The CJEU still has to rule on the European Commission’s appeal in the Apple case, which also deals with intragroup profit allocation and for which the definition of the correct reference framework is also a key point of debate. Other cases are still under formal investigation, for which progress, if any, is not public.

We will keep you informed about further developments. Should you have any question, please contact the authors of this newsletter (which formed part of the team successfully assisting Amazon) or your trusted Loyens & Loeff adviser.