EU court’s state aid decision in Amazon tax case published in English

By Doug Connolly, MNE Tax

The General Court of the European Union on May 17 published the English-language version of its decision holding that the European Commission failed to establish that Luxembourg’s tax treatment of Amazon violated EU state aid law. The court’s decision annulled the Commission’s decision that Amazon owed EUR 250 million (approximately USD 300 million) in additional taxes, plus interest, for the years at issue.

The decision, initially released last week alongside the court’s ENGIE decision, analyzed the European Commission’s 2017 decision that Luxembourg had illegally granted Amazon state aid through a tax ruling issued by the Luxembourg tax authorities approving Amazon’s methodology for pricing royalty payments between European subsidiaries.

 “The Commission has not succeeded, by any of the findings set out in the contested decision, in demonstrating to the requisite legal standard the existence of an advantage within the meaning of [EU state aid law],” the General Court said.

It added that “the Commission found, at most, a methodological error in the calculation of [the Amazon subsidiary operating company’s] remuneration, without succeeding in showing that that error had the effect of artificially reducing [that company’s] remuneration to such an extent that that level of remuneration could not have occurred under market conditions.”

The General Court’s decision is appealable to the European Court of Justice.

Commission’s assertion of state aid in Amazon’s case

Amazon’s case centered around the pricing of royalties charged between Amazon’s European subsidiaries in 2006–2014. At the time, Amazon operated in Europe through two subsidiaries based in Luxembourg, a holding company and an operating company.

The holding company held the intangible assets necessary for Amazon’s European activities, and it sub-licensed those assets to the operating company in exchange for royalty payments. The holding company, a limited partnership, was not subject to Luxembourg corporate income tax because of its legal form.

In response to an Amazon request, the Luxembourg tax authorities issued a ruling in 2003 supporting Amazon’s transfer pricing methodology for setting an arm’s-length royalty payment amount between the subsidiaries.

The European Commission’s 2017 decision asserted that the Luxembourg ruling endorsing the arm’s length nature of the royalty payments from 2006–2014 constituted illegal state aid under EU law. The Commission determined that the royalties paid were too high, thereby artificially reducing the operating company’s income subject to tax. It ordered Luxembourg to recover the unlawful state aid, determined to be EUR 250 million.

The Commission’s decision asserted several flaws with Amazon’s pricing of the royalties and the corresponding ruling supporting the pricing. The Commission primarily contested the use of the operating company as the “tested party” in the methodology. It also disagreed with the choice of transfer pricing method used (the transactional net margin method), the choice of profit level indicator, and the inclusion of a “ceiling mechanism.”

Court’s annulment of Commission’s Amazon decision

Amazon and Luxembourg both brought actions seeking annulment of the Commission’s decision, and the General Court has now upheld their arguments contesting the decision. In so doing, the court clarified the scope of the Commission’s burden of proof in establishing the existence of advantage relating to unfair state aid based on the choice of transfer pricing method.

The court explained that in establishing an advantage under EU state aid law with respect to tax measures, it is necessary to compare the taxpayer’s position with and without the alleged preferential tax treatment. In intra-group transactions, the law is intended to tax profits as if the activities had been carried out at arm’s length. Thus, to establish an advantage in transfer pricing cases, the Commission must show that errors in the methodology result in pricing that is not arm’s length, which, in turn, results in a reduction in taxable profit.

In examining the merits of the Commission’s analysis of the transfer pricing methodology, the court determined that there were errors throughout. It found that the Commission did not demonstrate that the choice of the holding company as the tested party would have resulted in more reliable comparison data.

The court further concluded that, even if the holding company should have been the tested party, the Commission did not establish the existence of an advantage because its resulting pricing assertions were unfounded. Additionally, the court found that the Commission erred in evaluating the compensation the holding company could expect.

Overall, the court held that the Commission failed to establish that the operating company’s tax burden was artificially reduced by overpricing the royalty as a result of the choice of tested party.

The court found similar issues with the Commission’s other contentions. It said that the Commission failed to demonstrate that the methodological errors the Commission identified led to an undervaluation of the royalties and a resulting reduced tax burden.

Because the court determined that none of the Commission’s findings satisfied the evidentiary requirements for establishing an advantage under EU state aid law, it annulled the Commission’s decision in its entirety.