European Commission opens state aid investigation into the Netherlands' tax treatment of IKEA

“Yet again, the EU Commission appears to be second-guessing the judgement of the national tax authorities, in this case in the Netherlands, as to whether transfer pricing arrangements are arm’s length,” said Ian Hyde, a tax disputes expert at Pinsent Masons, the law firm behind Out-law.com.

The investigation relates to rulings given by the Dutch tax authorities to IKEA Systems (Systems), a Dutch subsidiary of Inter IKEA group. Since the early 1980s the group has operated using a franchise concept, which involves IKEA shops worldwide being owned by INGKA, an independent group. The shops pay a franchise fee of 3% of their turnover to Systems. This entitles the IKEA shops to use the IKEA trademark, and receive know-how to operate and exploit the IKEA franchise concept.

From 2006 to 2011 Systems paid an annual licence fee to another group company (Holding),  based in Luxembourg which held some of the intellectual property (IP). Holding was part of a special tax scheme, as a result of which it was exempt from corporate taxation in Luxembourg. A ruling from the Dutch tax authorities endorsed the licence fee paid by Systems to Holding.

In 2011, IKEA restructured as the Commission ruled in 2006 that the Luxembourg special tax scheme breached state aid rules. Systems bought the IP rights formerly held by Holding, using an intercompany loan from its Lichtenstein parent company. Another ruling from the Dutch tax authorities approved the price paid by Systems for the acquisition of the IP. It also endorsed the interest to be paid under loan to the parent company and the deduction of these interest payments from Systems' taxable profits in the Netherlands.

The Commission says that as a result of the interest payments, a significant part of Systems' franchise profits after 2011 was shifted to its parent in Liechtenstein.

The Commission is challenging whether the amounts paid by Systems were in accordance with the arm's length principle. It says it will be looking in particular at whether the level of the annual licence fee paid from 2006 to 2011 reflected Systems' contribution to the franchise business.

It will also consider whether the price Systems paid for the IP rights and the interest paid for the intercompany loan, endorsed in the 2011 tax ruling, "reflect economic reality".

In October the Commission decided that tax rulings given by Luxembourg granted "undue tax benefits" to online retailer Amazon of around €250 million which breached EU state aid rules. This followed a decision in August 2016 that Ireland had granted €13 billion of unlawful state aid to Apple and earlier rulings concerning Starbucks and Fiat.

Earlier this month the EU General Court rejected an application by the US government to intervene in the Apple state aid case, concluding that the US did not have a sufficient interest in the result of the case. The US had argued that it should also be allowed to intervene because US tax revenues would be affected and because the decision could harm bilateral tax treaty negotiations with EU member states as well as efforts to develop transfer pricing rules within the OECD framework.

In 2016 Robert Stack, the US Treasury official then in charge of international tax policy claimed the EU Commission was disproportionately targeting US companies in its state aid challenges.

“Although the EU Commission has turned its sights on a Swedish group, rather than the US multinationals which have been its main target, its argument is familiar:  profits have not been taxed anywhere, so there must be State Aid involved somewhere,” Ian Hyde said.

“The problem of untaxed profits is one which is being addressed by numerous initiatives, including the OECD BEPS project and the EU Harmful Tax Practices proposals. Adding state aid to the mix causes considerable uncertainty for business and governments alike," he said.

BEPS refers to the shifting of profits of multinational groups to low tax jurisdictions and the exploitation of mismatches between different tax systems so that little or no tax is paid. Following international recognition that the international tax system needed to be reformed to prevent BEPS, the G20 asked the OECD to recommend possible solutions. Its final reports were published in October 2015 and the recommendations are now being implemented.

Margrethe Vestager, the European Commissioner for Competition said: "All companies, big or small, multinational or not, should pay their fair share of tax. Member states cannot let selected companies pay less tax by allowing them to artificially shift their profits elsewhere. We will now carefully investigate the Netherlands' tax treatment of Inter IKEA."

Although the European Commission does not have direct authority over national direct tax systems of EU member states, it can investigate whether tax incentives breach EU ‘state aid’ law. State aid can occur whenever state resources are used to provide assistance that gives a company an advantage over others. A tax ruling which reduces a company's tax burden can be a transfer of state resources and can be seen to constitute an advantage if the incentive was not available to all.