The European Commission today published the nonconfidential version of its decision to open a formal investigation into Dutch tax rulings issued in 2006 and 2011 that may have allowed an IKEA subsidiary to reduce taxable profits in the Netherlands, giving it an unfair competitive advantage over other companies in breach of EU State aid rules.
The Commission’s opening decision, dated December 18, 2017, describes the reasons for the EU’s initiation of an in-depth investigation and gives the Netherlands, IKEA, and others an opportunity to respond. According to the Commission, IKEA subsidiary, Inter IKEA Systems, recognizes significant income in the Netherlands, collecting franchise fees from IKEA stores throughout the world equal to 3 percent of each store’s turnover. In return, the stores are permitted to use the IKEA trademark and receive know-how to operate and exploit the IKEA franchise concept. Between 2006-2011, Inter IKEA Systems paid annual license fees to a related IKEA company based in Luxembourg, I.I. Holding, S.A.. The payments to I.I. Holdings were in exchange for use of intellectual property rights, which were required to create and develop the IKEA franchise concept. I.I. Holding paid no corporate tax in Luxembourg because it was subject to a special Luxembourg exemption regime for holding companies in place at the time.
The method of calculating the license fee was endorsed by a 2006 Dutch advance pricing agreement, one of the two rulings that are the subject of the Commission’s in-depth investigation. The Commission says it has doubts that the 2006 APA was arm’s length and whether it resulted in an annual taxable profit for Inter IKEA Systems from 2006-11 that corresponds to a reliable approximation of a market-based outcome.
Inter IKEA Systems later purchased the IP rights held by I.I. Holding. The Dutch subsidiary financed this acquisition by taking out a loan from its Liechtenstein parent.
A 2011 tax ruling granted by the Netherlands endorsed the price paid by Inter IKEA Systems for the acquisition of the intellectual property and the interest to be paid on the intercompany loan.
The Commission said it also has doubts whether the price agreed for the proprietary rights as agreed in the 2011 APA corresponds to an arm’s length price and therefore whether the 2011 APA results in an annual taxable profit for Inter IKEA Systems from 2012 onwards that corresponded to a reliable approximation of a market-based outcome in line with the arm’s length principle.
This inquiry follows EU Commission’s inquiry into a Netherlands tax ruling granted to Starbucks. The Commission concluded in that case that the Netherlands conferred a selective advantage Starbucks violating EU State aid rules. The case is currenly being litigated in EU court.
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