CN01 - General Court rules that Luxembourg granted no tax advantage to Amazon

On 12 May 2021, the General Court ("GC") overruled the Commission's decision finding that Luxembourg granted State aid to Amazon. It found that the Commission had failed to demonstrate that the intra-group transfer price at issue deviated from an arm's length outcome and that Amazon's tax burden in Luxembourg had, as a result, been unduly reduced.

Key takeaways

• The GC confirmed its previous findings – currently under appeal in the Fiat case – that the Commission may use an arm’s length principle as a 'tool' to assess applications of transfer pricing methods endorsed by individual tax rulings. In doing so, the Commission can refer to OECD guidelines.
• When determining whether the transfer price for a licence of a technology is in line with market conditions, the Commission cannot ignore 'unique and valuable' functions carried out in relation to the intangible assets in question. The amount of the royalty paid should reflect such functions.
• Methodological errors in the application of a transfer pricing method are not, in themselves, sufficient to prove the existence of an advantage. The Commission must prove that these errors have 'necessarily' led to a reduction in the tax burden on the recipients of the measures.

Background

The case relates to the transfer price of royalties paid by an Amazon Luxembourg operating company (LuxOpCo) to its Luxembourg parent company (LuxSCS) for the licence to use Amazon's technology in Europe. The Luxembourg tax authorities issued in 2003 a tax ruling confirming that the royalties were in line with Luxembourg's transfer pricing rules.

On 5 October 2017, the Commission concluded that these royalties were in its view below the value that would have been determined on an arm's length basis, with the result that LuxOpCo's remuneration (and, consequently its tax base) were reduced (the "Decision"). It therefore considered that Luxembourg granted a tax advantage (and consequently a State aid) to Amazon. In particular, the Commission argued that when calculating the transfer price according to the transactional net margin method (the "TNMM"), LuxSCS and not LuxOpCo should have been used as the 'tested party'.

The Commission ordered Luxembourg to recover EUR 250 million from Amazon. Both Luxembourg and Amazon challenged the decision before the GC as they considered that Amazon did not receive a tax advantage.

Judgment

The GC first confirmed that the Commission is competent to verify, under State aid rules, whether an individual tax ruling granted an advantage to the concerned tax payer as compared to the 'normal' taxation system. 

In line with the Starbucks, Fiat and Apple judgments, the GC confirmed its previous findings – currently under appeal in the Fiat case (C-898/19 and C-885/19) - that the Commission can:

• use an 'arms-length principle' to screen whether a given tax measure is in line with market conditions; and
• apply the OECD Guidelines on transfer pricing which, in the GC's words, reflect the "international consensus" and thus have "certain practical significance in the interpretation of issues relating to transfer pricing".

The GC clarified the scope of the Commission’s burden of proof in establishing the existence of an advantage in these circumstances. Methodological errors are not, in themselves, sufficient to prove the existence of an advantage. The Commission must prove that the error is "such that an approximation of an arm’s length outcome cannot be reached" and "it necessarily leads to an undervaluation of the remuneration that would have been received under market conditions".

The GC concluded that the Commission had failed to show the existence of an advantage and annulled the Decision in its entirely. 

As regards the Decision’s primary finding of an advantage, the Commission wrongly considered that LuxSCS (and not LuxOpCo) should have been used as the 'tested party' in order to determine the amount of the royalty: 

• the Commission underestimated the functions performed by LuxSCS. In particular, it ignored that LuxSCS made available 'unique and valuable' intangible assets, for which no comparable existed. In accordance with the OECD Guidelines applicable at the time of the ruling, LuxSCS could therefore not be regarded as the 'least complex entity' and therefore the 'tested party'. Also, it ignored that LuxSCS contributed to the development of the intangible assets through its financial contribution under a cost sharing agreement with Amazon US entities;
• in any event, it did not prove that it was easier to find undertakings comparable to LuxSCS than undertakings comparable to LuxOpCo.

As regards the Decision's subsidiary findings of an advantage, the Commission failed to establish that the alleged methodological errors identified necessarily led to an undervaluation of LuxOpCo's remuneration, and accordingly, the existence of an advantage consisting of a reduction of its tax burden. 

Comment

After the Starbucks and Apple judgments, this judgment is the third defeat for the Commission in relation to individual tax rulings cases. It confirms that it cannot presume the existence of an advantage or infer it from alleged methodological errors in the application of a transfer pricing method. In this case, the Commission ignored that the Luxembourg holding entity carried out 'unique and valuable' functions in relation to the intangible assets at issue and that the amount of the royalty paid should reflect these functions. 

The legal basis for the Commission to use an 'arm's length principle' to screen whether a transfer price is in line with market conditions and the rules that can be applied in this context are questions which are currently being debated before the Court of Justice in the Fiat case.

On the same day, the GC confirmed the Commission's decision ordering Luxembourg to recover EUR 100 million from Engie. While the GC recognised that the applicable Luxembourg tax rules (whose legality was not contested) were correctly applied, it found that the ruling at issue nonetheless granted a selective advantage to Engie. Following a novel and extensive interpretation of the concept of State aid, the GC considered that it was necessary to go "beyond the legal form in order to look at the economic and fiscal reality of the structure" and that the Luxembourg tax authorities should have applied their national rules on abuse of law.

Both judgments may still be appealed before the European Court of Justice.

With thanks to Jessica Bracker of Ashurst for her contribution.