EU court rejects Nike’s challenge of transfer pricing state aid investigation

The General Court of the EU on July 14 dismissed an action by Nike to annul a decision by the European Commission to investigate whether advance pricing agreements (APAs) concluded by the Netherlands with Nike constituted unlawful state aid.

The APAs in question validate the transfer pricing of royalties payable by Nike subsidiaries in the Netherlands to other Nike group companies that are not taxed in the Netherlands. The royalties paid are deductible from the taxable income of the Netherlands subsidiaries.

The European Commission, in a provisional assessment, determined that the APAs resulted in a level of profit for the Netherlands subsidiaries that was lower than it would have been if the transactions were priced at arm’s length. To further assess whether the alleged preferential corporate tax treatment amounted to unlawful state aid, the Commission opened a formal investigation in 2019.

Nike asked the court to annul the Commission’s decision to open the investigation, arguing breach of obligation to state reasons, manifest errors of assessment, and non-compliance with procedural rights. The court has rejected each of the arguments.

As initiating a formal investigation merely closes the preliminary examination stage and opens further information gathering, the court explained “it is not necessary for the reasoning to go into all the relevant facts and points of law.” Instead, the decision must simply summarize relevant facts and laws and include a preliminary assessment regarding state aid.

Accordingly, the court stated that “the Commission did not fail to fulfill its obligation to state reasons by failing to set out reasons as to whether or not an aid scheme exists in the present case.”

Similarly, noting the difficulties inherent in transfer pricing analysis, the court said that “the initiation of the formal investigation procedure cannot reasonably be challenged” based on manifest errors of assessment.

In addition, the court concluded that the Commission did not violate procedural rights by failing to first investigate whether a broader aid scheme was involved before investigating individual aid in the case of Nike.