Luxembourg must now recover some EUR 120 million from ENGIE. This decision should not directly impact other taxpayers, as it concerns an individual measure.

According to Article 107(1) of the Treaty on the Functioning of the European Union (TFEU), measures that affect trade between Member States and distort, or threaten to distort, competition by granting a selective advantage to certain undertakings, are incompatible with the EU Single Market. ATRs should not have the effect of lowering the tax liability of the beneficiaries compared to other taxpayers in a similar legal and factual situation.

In the case of ENGIE, the European Commission investigated two Luxembourg domestic hybrid financing structures. The ATRs obtained by ENGIE 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. Subsequently, the domestic participation exemption seems to have applied to the income received in relation to such shares. The European Commission considers that the resulting “deduction without inclusion” is not in line with Luxembourg tax rules and that a selective advantage was given to ENGIE.

More on the Commission’s reasoning will be known once the decision itself will be published. The announcement by the European Commission, accessible here, does not make clear whether the deduction should have been denied at the level of the borrower or the income should have been taxed at the level of the other concerned companies. The press release of the Luxembourg government reacting to the announcement can be found here. It alludes to the proposed abolition of the provision allowing for a rollover relief for a lender converting loans into shares issued by the debtor as from 2019 (see our flash of 20 June 2018 here).

The European Commission’s decision can be challenged before the Court of Justice of the European Union under Article 263 of the TFEU, by Luxembourg, other Member States, ENGIE and other parties who are directly and individually concerned.

Appeals with the EU General Court are already pending in the Apple (Ireland), Starbucks (the Netherlands), Fiat (Luxembourg), Amazon (Luxembourg) and excess profit ruling (Belgium) cases. Several other tax State aid cases are still in the formal investigation procedure stage concerning McDonald’s in Luxembourg, Inter Ikea in the Netherlands, Gibraltar’s tax ruling regime and some elements of the UK CFC financing exemption. The European Commission continues to look into the tax practices of Member States and can be expected to open more investigations.


We will keep you informed on future developments. Should you have any question, please contact your trusted Loyens & Loeff adviser.