The Amazon case, recently determined by the CJEU, provides an excellent summary of the EU’s state-aid principles governing taxation measures taken by member states. Marco W Hickey clears the vines
On 14 December 2023, the Court of Justice of the European Union (CJEU) delivered its judgment in C457/21P Grand Duchy of Luxembourg, Amazon EU Sàrl and Amazon.com, Inc v European Commission.
The case concerned an appeal against the decision of the General Court annulling a finding by the EU Commission that Luxembourg had granted state aid to Amazon in the form of a tax ruling (subsequently extended) relating to the calculation of royalties payable by an Amazon group limited partnership in Luxembourg to another Amazon group entity in the US, in the context of Luxembourg’s transfer-pricing rules and the income and net-wealth tax treatment of the US-based partners of the Luxembourg limited partnership.
Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) requires each of the following conditions to be fulfilled for a finding of state aid:
1) There must be an intervention by the state or through state resources,
2) The intervention must be liable to affect trade between member states,
3) It must confer a selective advantage on the beneficiary, and
4) It must distort or threaten to distort competition.
Many of the disputes regarding the treatment of national taxation matters in the context of the EU state-aid rules, including the recent Amazon case, centre on the issue of whether the selective-advantage criterion above has been properly met by the commission in its application of EU state-aid law.
I put a spell on you
The CJEU in Amazon, citing Fiat Chrysler Finance Europe v European Commission (8 November 2022), described ‘selective advantage’ as requiring a determination as to whether, under a particular legal regime, the national measure at issue is such as to favour ‘certain undertakings or the production of certain goods’ over other undertakings that, in the light of the objective pursued by that regime, are in a comparable factual and legal situation and that, accordingly, suffer different treatment that can, in essence, be classified as discriminatory.
To classify a national tax measure as ‘selective’, the CJEU confirmed that the commission must implement the following three steps:
- Firstly, it must identify the reference system, that is, the ‘normal’ tax system applicable in the member state concerned,
- Secondly, it must be shown that the tax measure at issue is a derogation from that reference system, insofar as it differentiates between operators who, in the light of the objective pursued by that system, are in a comparable factual and legal situation, and
- Thirdly, the concept of ‘state aid’ does not, however, cover measures that differentiate between undertakings that, in the light of the objective pursued by the legal regime concerned, are in a comparable factual and legal situation, and are therefore a priori selective, where the member state concerned is able to demonstrate that the differentiation is justified, in the sense that it flows from the nature or general structure of the system of which those measures form part. The application of the above distinction and the dividing line between them has been described as “very difficult to draw” and is arguably a “matter of judgement and impression”.
The CJEU stressed that determining the reference system is of particular importance in the case of tax measures, since the existence of an economic advantage for the purposes of article 107(1) of the TFEU may be established only when compared with ‘normal’ taxation.
Thus, the determination of the set of undertakings that are in a comparable factual and legal situation depends on the prior definition of the legal regime and its objective, in the light of which it is necessary, where applicable, to examine whether the factual and legal situation of the undertakings favoured by the measure in question is comparable with that of those which are not.
The CJEU stressed that, for the purposes of assessing the selective nature of a tax measure, it is therefore necessary that the common tax regime or the reference system applicable in the member state concerned be correctly identified in the commission decision, and examined by the court hearing a dispute concerning that identification.
Since the determination of the reference system constitutes the starting point for the comparative examination to be carried out in the context of the assessment of selectivity, an error made in that determination necessarily vitiates the whole of the analysis of the condition relating to selectivity.
Heard it through the grapevine
With regard to identifying the reference system, the CJEU highlighted that two steps are necessary.
Firstly, the determination of the reference framework, which must be carried out following an exchange of arguments with the member state concerned, must follow from an objective examination of the content, the structure, and the specific effects of the applicable rules under the national law of that state.
Secondly, in the absence of harmonisation of tax law at EU level, it is the member state concerned that determines, by exercising its own competence in the matter of direct taxation and with due regard for its fiscal autonomy, the characteristics constituting the tax, which define, in principle, the reference system or the ‘normal’ tax regime, from which it is necessary to analyse the condition relating to selectivity.
This includes, in particular, the determination of the basis of assessment, the taxable event, and any exemptions that may apply.
Down on the corner
The CJEU underlined that it followed that only the national law applicable in the member state concerned must be considered to identify the reference system for direct taxation – that identification being itself an essential prerequisite for assessing not only the existence of an advantage, but also whether it is selective in nature.
The ‘arm’s-length principle’ can only be applied if it is recognised by the national law concerned and in accordance with the detailed rules defined by it.
Under EU law as it stood at the time, there was no autonomous arm’s-length principle that applied independently of the incorporation of that principle into national law for the purposes of examining tax measures in the context of the application of article 107(1).
The CJEU referred to its decision in Fiat, where it held that that, while the national law applicable to companies in Luxembourg was intended, as regards the taxation of integrated companies, to bring about a reliable approximation of the market price, and while that objective corresponded, in general terms, to that of the arm’s-length principle, the fact remained that, in the absence of harmonisation in EU law, the specific detailed rules for the application of that principle are defined by national law and must be taken into account in order to identify the reference framework for the purposes of determining the existence of a selective advantage.
The CJEU recalled that the OECD Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations are not binding on OECD member states.
As the court pointed out in Fiat, even if many national tax authorities are guided by those guidelines in the preparation and control of transfer prices, it is only the national provisions that are relevant for the purposes of analysing whether particular transactions must be examined in the light of the arm’s-length principle and, if so, whether or not transfer prices, which form the basis of a taxpayer’s taxable income and its allocation among the states concerned, deviate from an arm’s-length outcome.
The CJEU highlighted that parameters and rules external to the national tax system at issue, such as the OECD guidelines, cannot be taken into account in the examination of the existence of a selective tax advantage, as provided for in article 107(1), and for the purposes of establishing the tax burden that should normally be borne by an undertaking, unless that national tax system makes explicit reference to them.
Bad moon rising
The CJEU held that the General Court, in this case, has erred in finding that the EU Commission could, in a general manner, apply the arm’s-length principle in the context of implementing article 107(1) of the TFEU, even though that principle has no autonomous existence in EU law, without stating that that commission was required, as a preliminary step, to satisfy itself that that principle was incorporated into the national tax law concerned.
The CJEU held that there was no autonomous arm’s-length principle that applied independently of the incorporation of that principle into national law.
The new article of the Luxembourg tax law that explicitly formalised the application of the arm’s-length principle under Luxembourg tax law was adopted only after the issue and extension of the tax ruling at issue.
Furthermore, by applying the OECD guidelines on transfer pricing without having demonstrated that they had been, wholly or in part, explicitly adopted in Luxembourg law, the commission breached the prohibition on taking into account parameters and rules external to the national tax system at issue, such as those guidelines.
The CJEU confirmed that such errors in determining the rules applicable under the relevant national law and, therefore, in identifying the ‘normal’ taxation in the light of which the tax ruling at issue had to be assessed, necessarily invalidated the entirety of the reasoning relating to the existence of a selective advantage.
Consequently, the General Court was fully entitled to find that the commission had not established the existence of an advantage for the benefit of the Amazon group, within the meaning of article 107(1) and to annul the decision at issue.
Fortunate son
Apple represents another recent case in which the Luxembourg courts have found that the commission erred in its EU state-aid analysis of national tax measures and conclusions on selective advantage.
Ireland acted as an intervener in each of the Amazon, Fiat and ENGIE cases, supporting the argument that state aid had not been shown to exist in each case.
These judgments against the commission’s findings on selective advantage might have given some comfort to Ireland in the context of the appeal to the CJEU in cases T-778/16 and T-892/16 Ireland and Others v European Commission.
Case C-465/20 is pending appeal against the judgment of the General Court (on 15 July 2020) in Ireland and Others v European Commission, although Advocate General Pitruzella (9 November 2023) opined that the General Court erred in its conclusions and recommended to the CJEU that the appeal be allowed and that the commission’s finding that Ireland granted state aid to Apple be upheld.
The CJEU is not bound by the opinion of the advocate general, although it does follow the opinion in most cases.
We will have to wait and see the outcome of the appeal before the CJEU against the decision of the General Court in Apple.
Marco W Hickey is head of the EU Competition and Regulated Markets Unit at LK Shields Solicitors
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