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European Court Finds For Commission In Another State Aid Case

Tuesday 18th May 2021

The General Court of the European Union has found for the European Commission in another Luxembourg State aid case.

In Cases T-516/18 Luxembourg v Commission and T-525/18 Engie, Engie Global LNG Holding Sarl and Engie Invest International SA v Commission, the General Court has held that tax rulings granted by Luxembourg to companies in the Engie group included tax advantages.

Between 2008 and 2014, the Luxembourg tax authorities adopted two sets of tax rulings in connection with intra-group financing structures relating to the transfer of activities between companies of the Engie group resident in Luxembourg. The transactions involved a holding company transferring shares of a subsidiary to another subsidiary with the transfer financed by an interest-free convertible loan from another group intermediary. On conversion, the subsidiary issued shares equivalent to the nominal amount of the loan plus a premium representing all of the profits made by the subsidiary during the term of the loan.  The intermediary had entered into a prepaid forward sale contract with the holding company under which the holding company paid to the intermediary an amount equal to the nominal amount of the loan in exchange for the acquisition of the rights to the shares that the subsidiary would issue on conversion of the loan. The financing structure effectively resulted in a transfer of profits of the subsidiary to the holding company free from tax.

On investigation of the tax rulings, the Commission concluded that they constituted State aid incompatible with the internal market which must be recovered from the recipients by the Luxembourg authorities.

The GCEU held that the Commission had not erred in law in determining that the participation exemption at the level of a parent company was dependent on the taxation at the level of its subsidiary of profits distributed by that subsidiary.

The GCEU also reviewed the Commission’s decision on the selectivity of the contested tax rulings in the light of the provision relating to abuse of law, which is an integral part of the Luxembourg corporate income tax system. It held that the Engie group had received preferential tax treatment as the result of the non-application in the contested tax rulings of the provision relating to abuse of law.

An appeal, limited to points of law only, may be brought before the Court of Justice against the decision of the GCEU within two months and ten days of notification of the decision.

If you would like more details on this decision, please contact Keith Rushen on +44 (0)20 7486 2378.

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