The EU General Court Tuesday ruled in favor of Starbucks and in disadvantage of Fiat on the European’s Commission claim that both companies received illegal state aid from the Dutch, respectively Luxembourg tax administration. Notwithstanding the general expectation exists that both cases will be further dealt with in appeal, they will be intensively analyzed, in particular by Apple whose case is still under examination.
In 2015, the European Commission found that the Advance Pricing Agreement (“APA”) concluded between the Dutch tax authorities and Starbucks, constituted State aid incompatible with the internal market. Therefore, it ordered the recovery of that aid. The APA tackled the compensation of Starbucks Manufacturing Emea BV in view of its production and distribution activities.
On September 24th, however, the General Court annulled the Commission’s decision. According to the General Court, the European Commission was not able to demonstrate the existence of an economic advantage in the meaning of State aid with respect to Article 107 (1) of the Treaty on the Functioning of the European Union (“TFEU”). The Court confirmed that the European Commission was entitled to analyse the tax ruling in the light of the arm’s length principle. However, it judged that the lines of reasoning of the European Commission are not sufficient to demonstrate that the APA granted Starbucks Manufacturing Emea BV an advantage in the meaning of Article 107 (1) TFEU. Therefore, the contested decision must be annulled in its entirety without that the other pleas put forward by the Kingdom of the Netherlands and by Starbucks need to be investigated.
In 2015, the European Commission found that the tax ruling concluded between the Luxembourg tax authorities and Fiat, constituted State aid incompatible with the internal market. The tax ruling deals with a method for arriving at a profit allocation to Fiat Finance and Trade Ltd (“FFT”) within the Fiat/Chrysler group, which enabled FFT to determine its corporate income tax liability to the Grand Duchy of Luxembourg. The tax ruling agrees on the calculation methodology of the overall remuneration in view of FFT for its financing and treasury activities consisting of, on the one hand, a risk remuneration (hypothetical regulatory capital, based on Basel II framework, multiplied by return on equity, estimated using the Capital Asset Pricing Model), and on the other hand, a functions remuneration (FFT’s capital designated to perform its functions multiplied by market interest rate applied to short term deposits).
On September 24th, the General Court ruled in favour of the European Commission in that it dismissed the actions brought by both Luxembourg and FFT, and confirmed the validity of the Commission’s decision. According to the Court, the European Commission did not engage in any tax harmonization in disguise. Here also, the Court ruled that the European Commission was entitled to analyse the tax ruling in the light of the arm’s length principle and, moreover, that the European Commission was correct in that the arrangements for the application of the TNMM included in the tax ruling were incorrect. Additionally, on the selectivity criterion, the Court concluded that the Commission did not err in finding that the advantage conferred on FFT by the tax ruling at issue was indeed selective, since the conditions attached to the presumption of selectivity were fulfilled in this case. Furthermore it rejected the pleas to the effect that the European Commission failed to establish that there was a restriction of competition. Finally, the Court concluded that the recovery of the aid does not breach the principle of legal certainty.
We will provide you with a detailed analysis of these interesting transfer pricing cases in the weeks to follow.