State aid and tax: Commission overruled in Starbucks case, but upheld in Fiat

In October 2015 the Commission decided that rulings provided to Fiat by Luxembourg and Starbucks by the Netherlands constituted unlawful state aid and that the countries would have to recover €20 million to €30m from each company to claw back the benefits of the state aid received. The Netherlands and Starbucks and Luxembourg and Fiat brought separate actions before the General Court for annulment of the Commission’s decisions.

In the Starbucks case the Commission said an advance pricing agreement (APA) issued by the Dutch authorities in 2008 gave a selective advantage to Starbucks Manufacturing, a Netherlands company, which had the effect of reducing its tax liability. The APA was calculated based on a "very substantial" royalty paid by Starbucks Manufacturing to a UK-based entity in the Starbucks group for coffee-roasting intellectual property.

Starbucks and the Netherlands disputed the finding that the APA conferred a selective advantage on Starbucks Manufacturing. The General Court said that the Commission was entitled to use the arm’s length principle as a criterion for assessing the existence of state aid, but said that although the Commission had criticised the transfer pricing methodology used, it had not demonstrated that this had resulted in an economic advantage for Starbucks.

The Court said that mere non-compliance with methodological requirements does not necessarily lead to a reduction of the tax burden and that the Commission would have had to demonstrate that the methodological errors identified in the APA did not allow a reliable approximation of an arm’s length outcome to be reached and that they led to a reduction of the tax burden.

"The General Court's decision in relation to the Starbucks APA is welcome news for corporates. It should give more certainty to companies that have conducted a proper transfer pricing study and obtained an APA," said Catherine Robins, a tax expert at Pinsent Masons, the law firm behind Out-law.

"However, both the decisions confirm that the Commission is entitled to look into the application of the arm's length rule to see whether it is being applied in a way which gives selective tax advantages," she said.

The European Commission does not have direct authority over national direct tax systems. However, it can investigate whether certain advantageous fiscal regimes would be prohibited under its state aid rules, which are intended to prevent the distortion of competition when national governments grant advantages or incentives to particular companies. If the Commission rules that member states have given unlawful state aid, it can require the member state to make any company pay back any illegal reliefs granted over a period usually covering up to 10 years.

In the Fiat case, the Commission said that a ruling issued by Luxembourg's tax authorities on the calculation of the taxable basis in Luxembourg for the financing activities Fiat Chrysler Finance Europe was unlawful state aid. The General Court upheld the Commission's ruling. It found that the transfer pricing methodology was not properly applied and minimised Fiat's remuneration. The Court said the Commission was entitled to conclude that the tax ruling conferred a selective advantage on Fiat because it resulted in a lowering of Fiat’s tax liability as compared to the tax that it would have had to pay under Luxembourg tax law.

Alan Davis, a Competition and state aid law expert at Pinsent Masons commented: "Although the Commission will be disappointed with the outcome of the Starbucks case, the Fiat decision appears to confirm that the Commission's approach to challenging special tax arrangements for multi-national companies through the application of EU State aid law was valid and justified. The Commission has also reaffirmed its intention to continue to look at aggressive tax planning measures under EU State aid rules to assess if they result in illegal State aid".

The decisions can be appealed to the Court of Justice of the European Union but on points of law only. 

"The decisions will be relevant for other tax state aid cases which are proceeding. Appeals to the General Court are in progress in relation to Apple and rulings from Ireland and rulings from Luxembourg to Amazon. The Commission is also in the process of investigating rulings issued by the Netherlands to Nike and IKEA and rulings from Luxembourg in relation to Huhtamaki," Catherine Robins said.

In February 2019, the General Court annulled a January 2016 decision of the Commission that Belgian excess profit tax rulings formed part of an aid scheme which constituted unlawful state aid. The Court decided that the Commission had failed to establish the existence of a scheme. The Commission has appealed this decision, but also opened separate in-depth investigations into the excess profits tax rulings granted by Belgium to 39 multinational companies.