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CJEU Upholds Appeal In Amazon State Aid Case
Friday 22nd December 2023
In its judgment in Case C-457/21 P | Commission v Amazon.com and Others, the Court of Justice has confirmed that the Commission had not established that the tax ruling given to Amazon by Luxembourg was a State aid incompatible with the internal market.
In 2003, on a request from the Amazon group, the Luxembourg tax authorities granted a tax ruling in respect of the tax treatment of (i) LuxSCS -a Luxembourg limited partnership, the partners of which were US entities of the Amazon group, and (ii) LuxOpCp, – a wholly owned subsidiary of LuxSCS.
In particular, the ‘arm’s length’ royalty to be paid by LuxOpCo to LuxSCS should be calculated according to the transactional net margin method using LuxOpCo as ‘the tested party’. The tax ruling confirmed that LuxSCS was not subject to Luxembourg corporate income tax because of its legal form and endorsed the method of calculating the annual royalty to be paid by LuxOpCo to LuxSCS.
In 2017, the Commission found that, in so far as it had endorsed the ‘arm’s length’ nature of the method of calculating the royalty to be paid by LuxOpCo to LuxSCS, that tax ruling, and its annual implementation from 2006 to 2014, constituted State aid for the purpose of Article 107 TFEU, which was incompatible with the internal market. More specifically, the Commission found the royalty paid by LuxOpCo to LuxSCS during the relevant period was too high, with the result that LuxOpCo’s remuneration and its tax base were artificially reduced.
Having found that the tax ruling had been implemented by Luxembourg without notification to the Commission in advance, it ordered the recovery from LuxOpCo of that aid which was unlawful and incompatible with the internal market.
Luxembourg and Amazon challenged the Commission’s decision before the General Court of the European Union.
In May 2021, the General Court held that the Commission had not demonstrated to the requisite legal standard that the Amazon group subsidiary concerned had benefited from an undue reduction in its tax burden. It held that Luxembourg had not granted a selective advantage in favour of that subsidiary and therefore annulled the Commission decision.
The CJEU has now rejected the appeal brought by the Commission against the judgment of the General Court.
The CJEU upheld the General Court’s conclusions but on different grounds. In particular, it considered that the General Court had wrongly recognised the arm’s length principle, in assessing whether intra-group transactions were made in accordance with market conditions, as having general application within the context of the implementation of EU State aid rules when, in fact, that principle has no autonomous existence in EU law. The Commission may rely on it only if it is incorporated into the national tax law concerned, i.e.the tax law of Luxembourg.
Similarly, contrary to the General Court’s finding, the OECD Guidelines on those transactions could be of practical importance in the case only if Luxembourg tax law made explicit reference to them. The Court of Justice concluded therefore that the Commission had wrongly determined the ‘reference system’ which is the first step in analysing a national measure, in order to categorise it as State aid.
Despite those errors of law and the incorrect conclusion of the General Court as to which reference system determined by Luxembourg tax law enshrined the arm’s length principle at the time the tax ruling at issue was adopted, the Court of Justice upheld the judgment under appeal. The Commission decision had to be annulled in any event because of the incorrect definition of the reference system, rather than for the reasons given by the General Court.
This latest judgment is consistent with those in earlier Fiat and Engie cases which confirmed that the Commission cannot apply non binding OECD transfer pricing guidelines instead of considering the national legal rules and application of the arm’s length principle, unless explicitly referred to in the national legislation.
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