UK and International Tax news

CJEU Judgment In Luxembourg State Aid Case

Wednesday 6th December 2023

The CJEU has annulled the General Court’s judgment in the joined Cases C-451/21 P | Luxembourg v Commission and C-454/21 P | Engie Global LNG Holding and Others v Commission.

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.

Following an investigation launched in September 2016, the European Commission concluded that Luxembourg had granted undue tax benefits of around €120m to Engie group companies and held this to be illegal state aid.

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. In addition, 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.

As a matter of principle, EU state aid rules require that illegal state aid is recovered in order to remove the distortion of competition created by the aid.

The Engie group and Luxembourg brought actions before the General Court of the European Union, which dismissed their actions. Engie and Luxembourg then brought an appeal before the Court of Justice.

The CJEU’s press release summarises that, in order to determine whether a national measure constitutes State aid, the Commission must demonstrate that the measure confers a selective advantage on the beneficiary. In order to classify a tax measure as ‘selective’, the Commission must identify the reference system, being the ‘normal’ tax system applied by the State concerned. The Commission must then demonstrate that the measure at issue derogates from that reference system because it differentiates between undertakings in a comparable situation.

The provisions of Luxembourg law at issue do not expressly make the exemption of income from participations at the level of a parent company dependent on the taxation of distributed profit at the level of its subsidiary. That was the interpretation of those provisions put forward by Luxembourg. In the present case, the Commission departed from that interpretation, finding that it was incompatible with the general objective of taxing all resident companies.

The CJEU noted, however, that the Commission is in principle required to accept the interpretation of provisions of national law given by the Member State, provided that that interpretation is compatible with the wording of those provisions. In the present case, nothing put forward by the Commission invalidates the interpretation put forward by Luxembourg, which is compatible with the wording of those provisions. The General Court therefore erred in upholding the Commission’s finding as to the existence of such a link of conditionality between those two tax treatments.

The General Court also erred in holding that the Commission was not required to take into account the administrative practice of the Luxembourg tax authorities relating to a national provision on abuse of law. In order to support its decision, the Commission should have established that, in the tax rulings at issue, the Luxembourg tax authorities departed from their own practice concerning transactions comparable to those at issue.

The CJEU also considers that the Commission made errors in its various analyses of the reference frameworks defining the normal tax system which taxed all resident companies if, in particular, it provided for exemptions to be excluded.  Those errors vitiated the whole of the selectivity analysis and the Commission’s decision is therefore annulled.

It is noted that the Advocate General Kokott had previously issued a non binding opinion in May 2023 that the Commission had erred in finding that Luxembourg had granted unlawful State aid to the Engie group in the form of tax advantages. In particular, she advised that national law alone constitutes the reference framework and, second, only manifestly incorrect tax rulings under that national law may constitute a selective advantage.

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