EU doubles down on State aid theory, orders Amazon to pay Luxembourg taxes

by Dimitrios Kyriazis, University of Oxford


Jeff Bezos: “Alexa, what’s the weather forecast for today?”
Alexa: “Stormy Jeff, I am afraid, especially in Brussels.”


This may be a fictitious dialogue between Amazon’s CEO and the company’s popular digital assistant, but it probably reflects the prevailing sentiment in Seattle today.

The EU’s Competition Commissioner, Margrethe Vestager, announced today that the European Commission had concluded its in-depth fiscal State aid investigation into Amazon’s tax affairs with the adoption of a negative decision.

Luxembourg, the Commission asserts, had illegally granted Amazon a tax ruling that had reduced its tax bill by approximately 250 million euros over eight years. This amount now needs to be repaid by Amazon, plus interest.

The timing was not ideal for Amazon, to say the least. The investigation that was concluded today had been opened in October 2014, i.e., three years ago (see my blog post on the opening decision here).

Amazon today launched its Echo and Alexa products in India and Japan, thus making its first relevant foray into Asia. Still, the launch has been overshadowed by the Commission’s allegation that Amazon had not been paying its “fair share of taxes.” But how did this all start?


The Amazon State aid decision is the most recent of a string of cases targeting large multinational companies and allegedly preferential tax ruling regimes.

Fiat, Starbucks and Apple have already been ordered to repay allegedly illegal State aid to Luxembourg, the Netherlands, and Ireland respectively. Moreover, Belgium has been asked to abolish its “Excess Profit” tax scheme and recover approximately 700 million euros from 35 multinational companies.

Engie and McDonald’s remain in the Commission’s crosshairs. It is perhaps worth noting that the Amazon investigation was the last one to be launched by former Competition Commissioner Almunia. His successor has proven to be even more determined to continue and intensify the fight against what is viewed as unfair tax competition.

The Commission’s account

The final decision in the Amazon case will only be released once all confidentiality concerns have been dealt with, and this usually takes at least three to four months.

For now, we need to examine the Commission’s press release and Commissioner Vestager’s statement in order to better understand the rationale underpinning the Commission’s assessment.

The epicentre of the Commission’s concerns is a tax ruling issued by Luxembourg in 2003, which allegedly reduced Amazon’s tax bill by around 250 million euros from 2006 to 2014. This tax ruling allegedly allowed Amazon to avoid taxation on three quarters of the profits it made from all Amazon sales in the EU. How did this work in practice?

Amazon EU is a company that is incorporated and tax resident in Luxembourg. Before Amazon restructured its tax affairs in 2015, any customer buying Amazon products online in Europe, e.g., from Amazon’s French website, was actually concluding a contract with Amazon EU and thus paying this Luxembourg company.

This arrangement allowed Amazon EU to accumulate vast amounts of profit. According to the Commissioner’s statement, Amazon EU had over 500 employees and ran Amazon’s European retail business. Its staff selected the goods for sale, bought them from manufacturers, and managed the online sale and the delivery of products to the customer, Commissioner Vestager said.

However, Amazon EU’s relationship with its parent company, Amazon Europe Holding Technologies (AEHT), allegedly enabled it to avoid paying its fair share of taxes.

AEHT is a holding company that has no employees, offices, or actual business activities. Moreover, contrary to Amazon EU, it is not taxed in Luxembourg. In other words, the more profits Amazon manages to shift from Amazon EU to AEHT, the lower its tax bill is in Luxembourg.

The Commission asserts that this is exactly what Luxembourg allowed Amazon to do under the 2003 tax ruling, i.e., to unduly shift large amounts of profits from Amazon EU to its parent company.

How did this transpire? Amazon EU used certain IP rights (e.g., brand names, trademarks) to operate Amazon’s European retail business. The relevant IP had been licensed by Amazon (in the US) to AEHT, so that Amazon EU had to pay AEHT a royalty to use the IP.

It is precisely the way in which the royalty was calculated and its allegedly excessive amount that led the Commission to the conclusion that it amounted to a breach of the Union’s State aid rules.

More specifically, the Commission’s objections as regards the royalty can be summarized as follows: the amount was too big (90% of Amazon EU’s profits) and this could not be justified.

The reasons why it could not be justified are twofold, the Commission said. First, the entity receiving the royalty, namely, AEHT, was “an empty shell” and it was “not in any way actively involved in the management, development or use of this IP.”

Moreover, “[i]t did not, and could not, perform any activities to justify the level of payments received.”

Second, the company paying the royalty, namely, Amazon EU, actually managed the IP and added value to it since it was the only entity “actively taking decisions and carrying out activities related to Amazon’s European retail business.” In other words, based on the two entities’ respective functions and responsibilities, the royalty’s amount seemed unreasonably large.

In legal terms, the Commission’s conclusion was that the method for calculating the royalty between the two Amazon entities, as endorsed by Luxembourg’s tax ruling, did not comply with the arm’s length principle. This principle stipulates that “payments between two companies in the same group should be in line with arrangements that take place under commercial conditions between independent businesses.”.

So far, so good. An unsuspecting reader would now ask: ‘OK, what does this have to do with EU Competition Law? This is tax-related!’

Well, this is where the plot thickens. Based on the press release, it is evident that the Commission continues to assert that any departure from the arm’s length principle amounts to the conferral of an advantage to the recipient company and, if all other State aid conditions are fulfilled, leads to a breach of Article 107 TFEU (the Union’s State aid prohibition).

In other words, the Commission continues to advance its theory that primary EU Law, i.e., Article 107 TFEU, includes a “general principle of equal treatment in taxation” which transforms any departure from the arm’s length principle into an advantage.

Which arm’s length principle ? Well, not the OECD’s arm’s length principle, as the EU has made clear in the Fiat, Starbucks, and Apples decisions, as well as in its 2016 Notice on the Notion of State Aid. This is an “EU law arm’s length principle,” which is similar, but not identical, to the OECD’s ALP.

The various problems that the Commission’s approach gives rise to, both doctrinal and practical, have been previously discussed here.


Judging by the press release and the Commissioner’s statement, it does not seem that the Amazon case is legally novel.

In fact, it appears to be based on the same (admittedly shaky) premises that underpinned its Fiat, Starbucks, and Apple decisions. The only way these issues can be resolved is through litigation.

The Fiat and Starbucks decisions were the first to be handed down and are now being challenged before the General Court, i.e., the EU’s court of first instance.

Whatever the outcome might be, it is safe to assume that they will eventually reach the European Court of Justice, where the Union’s top judges will get the chance to decide whether EU law obliges Member States to comply with the arm’s length principle when issuing tax rulings and, if so, whether this is something that the aid beneficiaries could have foreseen when receiving the tax rulings.

Amazon has already denied wrongdoing and claims it did not receive any special treatment from Luxembourg.

Luxembourg also asserts that Amazon has not been granted incompatible State aid. It is quite fitting that a case that started in Luxembourg will be resolved in Luxembourg. At the end of the day, iura novit curia.


Dimitrios Kyriazis

Dimitrios Kyriazis is Head of the Law Faculty and Senior Lecturer in Law at the New College of the Humanities and Stipendiary Lecturer in Law at Oxford University.

He joined NCH in 2017, having taught for several years at Oxford University on the undergraduate and postgraduate degrees.

He served as Teaching Fellow in Law at UCL, has delivered guest lectures at Leiden University and Queen Mary University of London, and has previously practised law in Brussels and Athens, primarily working on State aid, M&A, competition and banking law.

Dimitrios Kyriazis

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