EU investigating private tax deal granted to IKEA by Netherlands

The Commission is investigating Dutch tax rulings issued in 2006 and 2011 that may have allowed the IKEA subsidiary, Inter IKEA, to reduce taxable profits in the Netherlands, giving it an unfair competitive advantage over other companies in breach of EU State aid rules.

“All companies, big or small, multinational or not, should pay their fair share of tax. Member States cannot let selected companies pay less tax by allowing them to artificially shift their profits elsewhere. We will now carefully investigate the Netherlands’ tax treatment of Inter IKEA,” said Commissioner Margrethe Vestager, who heads the Commission’s competition unit.

Inter IKEA’s subsidiary, Inter IKEA Systems, recognizes significant income in the Netherlands. It collects franchise fees from IKEA stores throughout the world equal to 3 percent of the 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, the Netherlands subsidiary paid annual license fees to a related Luxembourg company, I.I. Holding, which were likely deductible in the Netherlands. The payments to I.I. Holding were related to use of the Luxembourg unit’s intellectual property rights, which were required to create and develop the IKEA franchise concept.

I.I. Holding paid no corporate tax in Luxembourg because of Luxembourg tax rules in place at the time. These rules were later determined to be illegal State aid by the Commission.

The method of calculating the license fee was endorsed by a 2006 private Netherlands tax ruling, one of the two rulings that are the subject of today’s announcement. Specifically, the Commission will assess whether the fee endorsed by the ruling reflects economic reality given Inter IKEA Systems’ contribution to the franchise business.

Following the determination that the Luxembourg law’s was illegal, Inter IKEA Systems purchased the IP rights held by  I.I. Holding. The Dutch subsidiary financed the 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 under the intercompany loan. This second tax ruling is also under investigation.

The Commission said it will assess whether the remuneration sanctioned under the second tax ruling reflects economic reality. In particular, the Commission’s focus will be on whether the acquisition price adequately reflects the contribution made by Inter IKEA Systems to the value of the franchise business and the level of interest deducted from Inter IKEA Systems’ tax base in the Netherlands.

This is the second time the Commission has challeged Netherlands tax rulings for potential State aid violations. An investigation of a 2008  Netherlands tax ruling granted to Starbucks led to the Commission’s conclusion of selective advantage, which is currently being challenged in court.