The European Commission today made it clear that it is not bowing to political pressure to halt its investigation into EU states that grant private tax deals to multinationals, announcing a probe into Luxembourg tax rulings granted to French energy company Engie, formally known as GDF Suez, for potential state aid violations.
The investigation concerns Luxembourg’s issuance of tax rulings to GDF Suez group members that appear to reach conflicting views regarding the characterization of intercompany zero interest rate convertible loans between GDF Suez group members as debt or equity.
“Financial transactions can be taxed differently depending on the type of transaction, equity or debt – but a single company cannot have the best of two worlds for one and the same transaction,” Margrethe Vestager, Commissioner in charge of competition policy, said.
The Commission said that since September 2008, Luxembourg has issued private tax rulings to the GDF Suez group confirming the tax treatment of two similar financial transactions between four of the group’s Luxembourg subsidiaries. In each of the two transactions, a group member lent money to another group member through interest-free loans that can be converted into equity.
The group obtained rulings from the Luxembourg tax authority confirming that the borrowers could deduct imputed interest payments on the interest-free loans in Luxembourg, allowing the group to greatly reduce its Luxembourg taxable income.
The loans were later converted into company shares which incorporated the value of the interest payments. According to the Commission, though, Luxembourg agreed in tax rulings that no profit attributable to the previously deducted interest was taxable in Luxembourg as it was dividend-like and associated with an equity investment.
“The Commission considers at this stage that the treatment endorsed in the tax rulings resulted in tax benefits in favour of GDF Suez, which are not available to other companies subject to the same national taxation rules in Luxembourg,” the Commission said.
Vestager said last April that she has developed particular concerns about tax rulings issued 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.
Many of the published Lux Leaks documents were Luxembourg tax rulings in which debt/equity classification was sought, showing the extent to which Luxembourg has issued tax rulings to multinationals on this issue. Though these rulings did not necessarily involve cases where the Luxembourg tax authorities granted conflicting opinions about the same transaction, as is the case with the GDF Suez rulings under investigation, some have alleged that Luxembourg’s debt/equity rulings have been based on desired outcomes rather than legal standards. The results of the Commission investigation will surely be watched by other firms that obtained such tax rulings from Luxembourg.
The Commission investigation into the Engie tax rulings is the third EU investigation into tax rulings granted by Luxembourg to multinationals. The Commission has already determined that a Luxembourg tax ruling granted Fiat was state aid because it sanctioned profit allocations that were not arm’s length. That case is now in court. Tax rulings granted to Amazon and McDonald’s are also under EU investigation.
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