UK and International Tax news
EC Finds Luxembourg Gave Illegal State Aid To Engie
Friday 22nd June 2018
Following an investigation launched in September 2016, the European Commission has concluded that Luxembourg granted undue tax benefits of around €120 million to Engie group companies and has held this to be illegal state aid.
In 2008 and 2010, Engie implemented two complex intra-group financing structures for two Engie group companies in Luxembourg, Engie LNG Supply and Engie Treasury Management. These involved a triangular transaction between Engie LNG Supply and Engie Treasury Management, respectively, and two other Engie group companies in Luxembourg.
The EC concluded that Luxembourg’s tax treatment of these financing structures did not reflect economic reality. Tax rulings issued by Luxembourg endorsed an inconsistent treatment of the same transaction both as debt and as equity. On this basis, the EC concluded that the tax rulings granted a selective economic advantage to Engie by allowing the group to pay less tax than other companies subject to the same national tax rules. According to the EC, the rulings enabled Engie to avoid paying any tax on 99% of the profits generated by Engie LNG Supply and Engie Treasury Management in Luxembourg.
EU state aid rules require that illegal state aid is recovered in order to remove the distortion of competition created by the aid. There are no fines under EU state aid rules and recovery does not penalise the company in question. It simply restores equal treatment with other companies.
In the case of LNG Supply, all income that has been transferred to Engie LNG Holding should have been taxed either as profits of Engie LNG Supply or profits of Engie LNG Holding at the standard Luxembourg corporate tax rate of around 29%. This means that Luxembourg must now recover about 120 million euros in unpaid tax from Engie, plus interest. It is for the Luxembourg tax authorities to determine the exact amount, based on the method set out in the EC decision. In the case of the second company, Engie Treasury Management, its profits have not been channelled to C.E.F. yet but they will have to be taxed in line with standard Luxembourg tax rules, as soon as the loan is converted and they are paid to the holding company. This will be closely monitored by the Luxembourg authorities and the EC.
Luxembourg has taken note of the decision by the European Commission in the ENGIE case, announced on 20 June 2018, and has responded in particular as follows:
“Luxembourg has stressed that it has cooperated fully with the Commission throughout its investigation and shares the Commission’s objective of fighting harmful tax avoidance. Luxembourg is fully committed to the OECD BEPS project and has actively supported the adoption of the European Union’s ATAD directives, in the spirit of the level playing field. On June 15, 2018, the government has adopted a draft law implementing the ATAD directive into Luxembourg law and amending provisions of the tax code, with the aim of preventing situations such as those mentioned by the Commission.
The Commission has acknowledged the recent initiatives taken by Luxembourg in this area. Nevertheless, as ENGIE has been taxed in accordance with the tax rules applicable at the relevant time, without having received a selective treatment, Luxembourg considers that ENGIE has not been granted State aid incompatible with the internal market, within the meaning of article 107(1) of the Treaty on the Functioning of the European Union.
Luxembourg will use appropriate due diligence to analyse the decision and reserves all its rights”.
The EC has stated that tax rulings as such are not a problem under EU state aid rules if they simply confirm that tax arrangements between companies within the same group comply with the relevant tax legislation. However, tax rulings that confer a selective tax advantage to specific companies can distort competition within the EU’s Single Market, in breach of EU State aid rules.
Since June 2013, the EC has been investigating individual tax rulings of member states under EU state aid rules and extended this information inquiry to all member states in December 2014.
In October 2015, the EC concluded that Luxembourg and the Netherlands had granted selective tax advantages to Fiat and Starbucks, respectively.
In January 2016, the EC concluded that selective tax advantages granted by Belgium to at least 35 multinationals, mainly from the EU, under its “excess profit” tax scheme are illegal under EU state aid rules.
In August 2016, the EC concluded that Ireland granted undue tax benefits of up to €13bn to Apple.
In October 2017, the EC concluded that Luxembourg granted undue tax benefits of up to €250m to Amazon.
The EC also has ongoing in-depth investigations concerning tax rulings issued by Luxembourg in favour of Mc Donald’s, by the Netherlands in favour of Inter IKEA, and one investigation concerning a tax scheme for multinationals in the UK under its CFC rules.