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CJEU annuls EC decision that certain Luxembourg tax rulings were State aid
December 2023
In brief
The Court of Justice of the European Union (CJEU) on December 5 ruled that Luxembourg did not grant State aid to Engie, a French company. Luxembourg and Engie had appealed the May 12, 2021 decision of the General Court of the European Union (GC), which had concluded that Luxembourg had granted State aid to Engie. The CJEU ruled that the European Commission (EC) had erred in its State aid analysis of the tax rulings granted to the Engie group.
The CJEU judgment reiterates that the foundational aspect of a selectivity examination under EU State aid rules is the national law as defined by the respective Member State. The EC is not permitted to introduce general principles into that examination. In this regard, the judgment aligns with the earlier CJEU decision on the FIAT case (see our previous newsalert).
Observation: While CJEU judgments are final, this is an individual case directly impacting only this taxpayer. Nevertheless, State aid remains dynamic, and judgments in other cases should be expected. Companies should track these judgments and analyze the impact on their current or planned operations.
In detail
Background
The EC’s investigation focused on tax rulings issued by the Luxembourg tax authorities between 2008 and 2014, which confirmed the tax treatment of certain mandatorily convertible instruments (‘instruments’) issued by two Luxembourg group subsidiaries (‘borrowers’) to two other Luxembourg companies of the group (‘lenders’). The rulings were confirming the following tax treatment:
- the borrowers treated the instruments as debt and recorded in their accounts accretions which were deductible at their level;
- the lenders entered into a forward sale agreement with a third entity with the receipt being exempt under the participation exemption regime.
In its final decision of 20 June 2018 (SA.44888), the EC considered that the tax rulings granted State aid by incorrectly lowering the tax basis of the Luxembourg companies. The EC analyzed the intragroup financing structure by looking at its final overall economic result — leading, in its view, to an inconsistent treatment of the same amounts as representing deductible expenses on the instruments at the level of the borrowers and exempt income under the domestic participation exemption regime at the level of the lenders — and disregarding the specific tax treatment applicable under the Luxembourg law at the time for each individual transaction.
In its judgments, the GC approved this approach and confirmed that the EC can determine the existence of a selective advantage for State aid purposes on the grounds of the nonapplication by tax authorities of a local concept of abuse of law. For further details on these judgments, refer to our previous newsalert.
CJEU decision
The CJEU ruled that the EC erred in determining the reference system that is the starting point of the comparative analysis, performed as part of the selectivity assessment, one of the key conditions required for classifying a tax measure as State aid.
The CJEU reiterated that determining the common tax regime or reference system, being the ‘normal’ tax system applicable in the EU Member Sate, is important since the existence of an economic advantage, under Article 107 TFEU, can only be established by comparison with ‘normal’ taxation. The CJEU further explained that, in tax matters that are not harmonized at the EU level, only the national law applicable in the EU Member State concerned can be taken into account in order to identify the reference system. In this context, the EC must demonstrate that a measure derogates from the reference system because it differentiates between undertakings that are in a comparable situation. Furthermore, the EC is not allowed to base its analysis on a general objective of taxing all resident companies.
In the case at hand, the EC assumed that the Luxembourg tax law in force at the time included a link of conditionality, according to which the tax exemption of a subsidiary’s income was contingent on the taxation of the subsidiary’s underlying profits. The CJEU highlighted that this link did not exist, as demonstrated by Luxembourg. In this regard the CJEU stated that the EC was required to accept the interpretation of the relevant provisions of national law given by Luxembourg, provided that the interpretation (1) is compatible with the wording of the provisions and (2) is not invalidated by case law or administrative practice of Luxembourg. Hence, the GC erred in confirming the EC’s decision as to a link of conditionality between the above two tax treatments.
In addition, the CJEU ruled that both the GC and the EC erred in considering that the administrative practice of the Luxembourg tax authorities with regard to the abuse of law provision was not to be taken into account, and that the Luxembourg tax authorities therefore were entitled to not apply the abuse of law provisions in this case in accordance with their own administrative practice.
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