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22 October 2015 / news

Tax Flash: European Commission announces final decisions in Starbucks and Fiat State Aid investigations

Yesterday, the EU Commission announced its final decisions that the advance pricing agreements (APAs) concluded with Starbucks (the Netherlands) and Fiat (Luxembourg) constitute unlawful state aid. In both cases, the Commission states that the tax burden was unduly reduced by EUR 20 to 30 million over the period under investigation. The EU Commission requires the Netherlands and Luxembourg to recover such state aid from Starbucks and Fiat respectively.


State aid rules require that incompatible state aid is recovered in order to reduce the distortion of competition in the EU Single Market. The EU Commission considers that APAs should not have the effect of granting taxpayers lower taxation than other taxpayers in a similar legal and factual situation.

The two final decisions, concerning Starbucks and Fiat, confirm that the EU Commission is determined to challenge potential state aid elements embedded in APAs, examining in a very detailed manner the transfer pricing methods agreed by tax authorities. Although the full text of the final decisions will not be published until confidentiality issues have been resolved, the announcement of the European Commission already gives sufficient guidance to warrant a renewed look at existing APAs in the European Union.


The EU Commission finds that a royalty paid by Starbucks Manufacturing EMEA BV (Starbucks Manufacturing) for the use of know-how cannot be justified as it does not adequately reflect market value. According to the EU Commission, only Starbucks Manufacturing is required to pay for using this know-how whereas no other Starbucks group company nor independent roasters to which roasting is outsourced are required to pay a royalty in essentially the same situation. The EU Commission finds that in the case of Starbucks Manufacturing the existence and level of the royalty means that a large part of its taxable profits is unduly shifted. Furthermore, the EU Commission is of the opinion that an inflated price - paid for green coffee beans to a Swiss based group trading company - unduly reduces Starbucks Manufacturing tax base, leaving no margin to pay the royalty.


The EU Commission finds that the APA concluded by Fiat Finance and Trade Sarl (FFT) endorses a methodology that is not appropriate for the calculation of taxable profits reflecting market conditions. In particular, the EU Commission finds it artificially lowers taxes paid by FFT in Luxembourg, by applying a number of economically unjustifiable assumptions, down-ward adjustments and a capital base for tax purposes that is much lower than the company's actual capital. In addition, the estimated remuneration applied to this already lower capital for tax purposes is also lower compared to market rates.

Initial comment by Loyens & Loeff

The Commission’s key message is that artificial and complex methods used to shift profits where there is no economic justification will not be accepted. Whether this particular application of the state aid provisions to corporate tax planning structures involving APAs will hold before the European courts, is still uncertain.

Both the Netherlands and Luxembourg governments issued statements claiming that the APAs granted do not amount to state aid. Also the two companies involved disagree with the EU Commission’s analysis. Nevertheless, the combination of the use of the state aid provisions and the other European initiatives to fight “base erosion and profit shifting”, are likely to have a serious impact on tax regimes and tax planning structures that are perceived by the EU to be privileged and harmful. The transparency initiatives in the corporate tax field (e.g., Country-by-Country Reporting and the automatic exchange of rulings in the EU) will also put more emphasis and pressure on tax planning structures involving APAs and rulings.

Moreover, the constant political, media and public attention are making MNEs and governments aware that it is extremely difficult to fight the widespread perception that they have struck inappropriate tax deals. Needless to say that all of these developments will also affect Swiss based MNEs, with potentially “sensitive rulings” in the EU.

Similar decisions can be expected in the other formal state aid investigations involving Apple, Amazon and the Belgian “excess profit ruling” system. More formal state aid investigations in relation to tax rulings can be expected to follow as the EU Commission requested a substantial number of individual tax rulings from various Member States earlier this year.

SAVE THE DATE: Loyens & Loeff Transfer Pricing Seminar

A Loyens & Loeff seminar on Transfer Pricing will be hosted in Geneva (1 December) and Zurich (2 December). Specialists from our Global Transfer Pricing team will discuss the recent international Transfer Pricing developments and their impact on Switzerland, among others, the implications of yesterday’s State Aid decisions.

We will keep you updated on any further relevant developments in the EU or Switzerland.


Although this publication has been compiled with great care, Loyens & Loeff N.V. and all other entities, partnerships, persons and practices trading under the name 'Loyens & Loeff', cannot accept any liability for the consequences of making use of this issue without their cooperation. The information provided is intended as general information and cannot be regarded as advice.