The CJEU found that the Commission should have assessed Fiat’s Luxembourg transfer pricing arrangement solely in light of Luxembourg rules and administrative guidance on transfer pricing, instead of merely abstractly looking at the “objective pursued by the general corporate income tax system”.
The Commission used a similar approach and reference framework in other still pending cases. The CJEU’s final judgment in this case may weaken the Commission’s stance in other still pending cases on state aid and transfer pricing.
State aid is defined as a measure granted by the State or through State resources, which distorts or threatens to distort competition and affects intra-EU trade by favouring certain undertakings or the production of certain goods. Measures meeting these criteria may constitute an aid scheme in particular in case they do not need further implementing measures and define beneficiaries in a general and abstract manner.
On 21 October 2015, the Commission concluded that Luxembourg had granted unlawful aid to a Fiat group company. The Commission challenged the transfer pricing analysis that supported the arm’s length character of the “margin” realised by this group company for its intragroup financing companies. The motives for the challenge related to the choice of the transfer pricing method, the choice of the profitability indicator, and the selection of comparable companies.
Fiat and Luxembourg had appealed unsuccessfully to the EU General Court. Fiat (as affected taxpayer) and Ireland (as intervener in first instance) then brought an appeal before the CJEU..
CJEU judgment sets framework for State aid review of tax rulings on transfer pricing
The CJEU set aside the EU General Court’s judgment of 2019 and annulled the Commission’s decision of 2015. The CJEU found that the Commission had wrongly defined the “reference framework”, i.e., the rules defining the level of “normal taxation” against which it must be assessed whether the measure at stake conferred a selective advantage to the beneficiary.
The CJEU recalled that taxation is a prerogative of Member States in the absence of EU harmonisation, albeit they must exercise their discretion within the framework of EU rules, including those regarding State aid. The CJEU then explained that the existence of fiscal State aid must therefore necessarily be assessed by reference solely to the national tax system. The Commission was wrong to consider that the arm’s length principle was embedded in article 107(1) of the Treaty on the Functioning of the European Union, which is the legal basis for State aid control.
The CJEU emphasised that the Commission should have assessed the tax ruling solely in light of Luxembourg rules and administrative guidance on transfer pricing, instead of merely abstractly looking at the “objective pursued by the general corporate income tax system”.
The CJEU set a framework for the Commission to review transfer pricing rulings under EU State aid rules:
“after having observed that a Member State has chosen to apply the arm’s length principle in order to establish the transfer prices of integrated companies, the Commission must […] be able to establish that the parameters laid down by national law are manifestly inconsistent with the objective of non-discriminatory taxation of all resident companies, whether integrated or not, pursued by the national tax system, by systematically leading to an undervaluation of the transfer prices applicable to integrated companies or to certain of them, such as finance companies, as compared to market prices for comparable transactions carried out by non-integrated companies.”
Impact on other cases
The CJEU judgment is particularly significant, as it is a final judgment. As the Commission has used a similar approach and reference framework in other still pending cases and has compared the tax position of the beneficiary of the tax ruling with the tax position of any other taxpayer for purposes of assessing the existence of a selective advantage, the CJEU judgment may further weaken the European Commission’s stance in these other cases.
The Apple, Amazon and ENGIE tax State aid cases all are pending before the CJEU, awaiting an oral hearing date to be set. Other cases (including Nike, IKEA and Huhtamäki) concerning potential tax State aid are still being investigated by the Commission and have been pending for several years already.
We will keep you informed of further developments. Please contact our State aid team or your trusted Loyens & Loeff adviser, should you have any question.