EU Commission releases opening decision in State aid probe of Luxembourg tax rulings granted Engie

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The European Commission today published a non-confidential version of its decision to open a State aid investigation into whether a tax rulings granted by Luxembourg to French energy company Engie, formally known as GDF Suez, granted illegal State aid.

The Commission’s decision, first announced in a September 19, 2016, press release, reaches the preliminary view that Luxembourg granted a selective advantage to GDF Suez group companies by issuing the group private rulings concerning the taxation of intercompany zero interest rate mandatory convertible loans (ZORAs). The Commission said the tax rulings inconsistently interpreted Luxembourg law and sanctioned double nontaxation.

The Luxembourg government responded to today’s release, asserting again that the Commission’s case is unfounded.

“Luxembourg is confident that the allegations of State aid in this case are unsubstantiated and that it will be able to convince the Commission in due time that no particular tax treatment or selective advantage has been granted to companies of the ENGIE group in Luxembourg,” the government said.

According to the Commission decision, Luxembourg issued private tax rulings to the GDF Suez group in 2008 and thereafter confirming the tax treatment of similar transactions between four of the group’s Luxembourg subsidiaries. In each of the transactions, a group member lent money to another group member using ZORAs.

The Luxembourg tax rulings confirmed that the borrowers could deduct imputed interest payments on the interest-free loans in Luxembourg, allowing the group to reduce its Luxembourg taxable income.

At the same time, the rulings concluded that interest income on the loans was limited to a fixed margin; the balance of the profit actually generated was considered an expense which the lender could deduct every year from its taxable income. That same expense amount was considered to increase in the value of the issue price of the ZORA.

Luxembourg also agreed in the tax rulings that when the loans were later converted into company shares no gain attributable to the ZORA accretions was taxable in Luxembourg as it was equity-like.

In its decision, the Commission took the preliminary view that, under Luxembourg law, the ZORA accretions should not be considered a deductible expense to the borrowers, or, alternatively, if they were deductible, the corresponding income should have been taxable to the recipient as it accrued.

The misapplication of Luxembourg law endorsed in the tax rulings led to a selective advantage to the GDF Suez Group companies not available to other companies as the ruling relieved the companies of a tax liability they would otherwise have been obliged to pay, the Commission said.

Thus, the Commission said its preliminary view is that aid was granted through the tax rulings which distorted competition.

The Commission investigation is the third EU investigation into tax rulings granted by Luxembourg to multinationals. The Commission has already determined that a Luxembourg tax ruling granted to Fiat was State aid because the ruling sanctioned profit allocations that were not arm’s length. That decision is now being challenged in court. Tax rulings granted by Luxembourg to Amazon and McDonald’s are also under EU investigation.

Margrethe Vestager, EU Commissioner in charge of competition policy, said in April 2015 that she has developed particular concerns about Luxembourg tax rulings granted to financing companies as a result of her office’s review for State aid compliance of about 600 tax rulings obtained from the 2014 “Lux Leaks” disclosures.

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