UK and International Tax news

EC Opens Investigation Into IKEA In The Netherlands

Friday 29th December 2017

The European Commission has opened an in-depth investigation into the Netherlands’ tax treatment of Inter IKEA.

The EC first requested information in April 2016 on certain tax rulings granted by the Netherlands to the Inter IKEA group following press allegations of a potential advantageous tax treatment and the report published by the Greens/ELA group of the European Parliament. The EC has stated that it has concerns over two Dutch tax rulings which may have given rise to unfair tax advantages in breach of state aid rules.

According to the EC announcement, the IKEA business model changed in the 1980s to a franchising model using the “IKEA franchise concept”. In return for a franchise fee of 3% of their turnover to Inter IKEA Systems [Dutch Co], a subsidiary of Inter IKEA group in the Netherlands, IKEA shops are entitled to use inter alia the IKEA trademark, and receive know-how to operate and exploit the IKEA franchise concept.

In the Netherlands, Dutch Co records all revenue from IKEA franchise fees worldwide collected from the IKEA shops. The EC’s investigation concerns the tax treatment of Dutch Co since 2006 with preliminary inquiries indicating that two tax rulings, granted by the Dutch tax authorities in 2006 and 2011, have significantly reduced Dutch Co’s taxable profits in the Netherlands.

The 2006 tax ruling endorsed a method to calculate an annual licence fee to be paid by Dutch Co to a group company in Luxembourg [Lux Co] which held certain intellectual property rights required for the IKEA franchise concept. Dutch Co used these intellectual property rights, licenced to it by Lux Co to create and develop the IKEA franchise concept and the intellectual property rights and also managed the franchise contracts and collect the franchise fees from IKEA shops worldwide.

The annual licence fee paid by Dutch Co to Lux Co formed a significant part of Dutch Co’s revenue which were effectively shifted to Luxembourg, where they remained untaxed. Lux co benefitted from a special tax scheme and  was exempt from corporate taxation in Luxembourg.

In July 2006, the EC concluded that the Luxembourg special tax scheme was illegal under EU state aid rules and required the scheme to be fully repealed by 31 December 2010. No illegal aid needed to be recovered from Lux Co because the scheme was granted under a Luxembourg law from 1929, predating the EC Treaty. This is a historical element of the case and not part of the current investigation. However, as a result of the EC decision Lux Co would have had to start paying corporate taxes in Luxembourg from 2011.

In 2011, Dutch Co changed the way it was structured and bought the intellectual property rights formerly held by Lux Co with the aid of a loan from its parent company in Liechtenstein.

The Dutch authorities then issued a second tax ruling in 2011, which endorsed the price paid by Dutch Co for the acquisition of the intellectual property and the deductibility of the interest to be paid on the loan to the parent company. As a result of the interest payments, a significant part of Dutch Co’s franchise profits after 2011 was shifted to Liechtenstein.

The EC considers at this stage that the treatment endorsed in the two tax rulings may have resulted in tax benefits in favour of Dutch Co which are not available to other companies subject to the same national taxation rules in the Netherlands.

The role of EU State aid control is to ensure that member states do not give selected companies a better tax treatment than others, via tax rulings or otherwise. More specifically, transactions between companies in a corporate group must be priced in a way that reflects economic reality. This means that the payments between two companies in the same group should be in line with arrangements that take place under comparable conditions between independent companies, the so called arm’s length principle.

The EC will now investigate Inter IKEA Systems’ tax treatment under both tax rulings and in particular assess whether the annual licence fee paid by Dutch Co to Lux Co from 2006 reflected economic reality and Dutch Co’s contribution to the franchise business. It will also assess whether the price Dutch Co paid for the acquisition of the intellectual property rights and consequently the interest paid for the intercompany loan, after the 2011 ruling reflected economic reality and whether the acquisition price adequately reflected the contribution made by Dutch Co to the value of the franchise business, and the level of interest deducted from Dutch Co’s  tax base in the Netherlands.

The opening of an in-depth investigation gives the Netherlands and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation

 

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