The European Commission has determined that private tax rulings granted by Luxembourg to subsidiaries of Engie, a French energy company, concerning the tax treatment of intercompany zero interest rate convertible loans were illegal State aid, thus completing an investigation that commenced in 2016.
As a result of the decision, Luxembourg must now recover about 120 million euros in unpaid tax from Engie, plus interest, the Commission said in a June 20 press release. The exact amount will be determined by the Luxembourg tax authorities based on information set out in the Commission decision.
The Commission said that the tax rulings, issued by Luxembourg in 2008 and 2010, inappropriately endorsed the inconsistent characterization of financing transactions between Engie group members as both as debt and as equity. This enabled two Engie group companies to claim significant interest deductions against their income and thus avoid paying taxes on almost all their profits in Luxembourg while the other group companies did not report corresponding income from the same transaction.
“These two companies make up only a small slice of the Engie group’s overall profits – but this small slice remained basically untaxed. And this was endorsed by the Luxembourg tax authorities,” said Commissioner Margrethe Vestager, who is in charge of competition policy.
The decision will be published once Engie has had an opportunity to review it to address any confidentiality concerns.
The Commission’s decision does not come as a surprise as it was leaked to the press last week.
At issue are multiple tax rulings issued to Engie LNG Supply, which buys, sells, and trades liquefied natural gas and related products in Luxembourg and to Engie Treasury Management, which manages internal financing within the Engie group.
Engie LNG Supply was provided funds from a related Luxembourg company, Engie LNG Holding, via an intermediary using a hybrid loan. This arrangement allowed Engie LNG Supply to take deductions from its profits equal to the accretions on the zero interest loan; however, equivalent interest income inclusions were not made by Engie LNG Holding at the time.
Instead, the loan and accretions were later converted into equity by the intermediary and paid to the holding companym with the gains considered a tax-free return on equity investment. The shares were then canceled, allowing Engie LNG Holding to receive the profits without paying tax.
The same structure was used for Engie Treasury Management and the tax treatment for both companies was endorsed by Luxembourg in separate tax rulings, the Commission said.
“This gave Engie an undue advantage. Our common EU State aid rules prevent Member States from giving unfair tax benefits only to selected companies. Member States cannot treat some companies better than others subject to the same national laws. That distorts competition and is illegal under EU State aid rules,” Vestager said.
The Commission’s decision follows its in-depth investigation launched in September 2016. Luxembourg has already disputed the Commission’s allegation of State aid in the matter, claiming that no particular tax treatment or selective advantage was granted to the Engie group in Luxembourg.
Vestager said in April 2015 that she had developed particular concerns about Luxembourg tax rulings granted to financing companies as a result of her office’s review for State aid compliance of about 600 tax rulings obtained from the 2014 “Lux Leaks” disclosures.
Be the first to comment