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Commission investigates European tax rulings on transfer pricing under EU state aid rules
September, 04th 2014

The Commission recently opened three in-depth investigations into rulings by the tax authorities of Ireland, the Netherlands and Luxembourg with regard to Apple’s, Starbucks’, and Fiat Finance and Trade’s corporate income tax1. Tax rulings are often used to confirm profit allocations and transfer pricing arrangements. The investigations will determine whether the arrangements permitted by these rulings constitute unlawful State aid under EU law. If the Commission determines that these rulings amount to illegal State aid, the relevant Member States will be required to recover the amount of the aid, plus interest, for up to 10 years.

The most recent investigations should be seen in the context of the Commission’s broader investigations into certain tax practices of several Member States, including in particular transfer pricing and taxation of profits from using or licensing intellectual property rights (IPR). In March 2014, the Commission adopted two information injunctions against Luxembourg for failure adequately to answer the Commission’s earlier information requests2. More generally, multinational tax planning is subject to the scrutiny of the OECD, under the so-called BEPS project.


Although the Commission has no direct authority over national tax systems, it can investigate whether certain fiscal regimes, including in the form of tax rulings, would constitute “unjustifiable” State aid to companies. The EU’s State aid rules are set out in the Treaty on the Functioning of the European Union (TFEU) and constitute part of the TFEU’s provisions on competition law. In general, Member States are prohibited from granting financial assistance in a way that distorts competition, unless the aid measure has been notified to and authorized by the Commission. The prohibition applies to any form of financial aid, including in the form of tax rulings. Although not problematic in themselves, tax rulings may amount to unlawful State aid if they provide selective advantages to a specific company or group of companies that are not approved under EU State aid rules.

Article 108(3) TFEU requires Member States to notify (non-exempted) State aid measures, including in the form of tax measures, to the Commission before their implementation, and to await the Commission’s approval before implementing such measures (so-called “standstill obligation”). If either of those obligations is not fulfilled, the State aid measure is considered to be unlawful. A notification triggers a preliminary investigation by the Commission. The Commission can also investigate unnotified State aid that has already been granted on its own initiative or following a third-party complaint.

If, following an in-depth investigation, the Commission finds that a measure constitutes illegal State aid, the Commission will require the Member State to recover the aid from the beneficiary (unless such recovery would be contrary to a general principle of EU law). In the case of tax measures, the amount to be covered is calculated “on the basis of a comparison between the tax actually paid and the amount that should have been paid if the generally applicable rule had been applied”. Interest is added to this basic amount. Recovery of past benefits could be ordered for up to ten years.

When can tax rulings constitute unlawful state aid?

Article 107(1) TFEU prohibits “any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the production of certain goods, in so far as it affects trade between Member States.”

Measures taken to exempt a company from an obligation to pay taxes can amount to unlawful State aid if the following conditions are met:

First, the tax measure must grant an economic advantage. In the case of tax rulings, an advantage will in principle exist where the tax payable under the tax ruling is lower than the tax that would otherwise have to be paid under the normally applicable tax system.

Second, the advantage must be financed through State resources. In cases where the tax authority lowers the effective tax rate that would otherwise be payable, the resulting loss of revenue for the State is equivalent to the use of State resources.

Third, the tax measure must distort or threaten to distort trade and competition between Member States. Where the beneficiary carries out an economic activity in the EU, this criterion is easily met.

Finally, the tax measure must be specific or selective in that it benefits “certain undertakings or the production of certain goods”. According to the Commission, “every decision of the administration that departs from the general tax rules to the benefit of individual undertakings in principle leads to a presumption of State aid and must be analysed in detail.”3 Therefore, a tax ruling that merely interprets general tax rules or manages tax revenue based on objective criteria will generally not constitute a specific advantage and hence not qualify as State aid under EU law. If the tax authorities use their discretion to apply a lower effective tax rate than would otherwise be applicable, however, a tax ruling may amount to State aid.

The classification of a tax benefit as general or specific is therefore crucial to determine its validity. Even a measure that appears prima facie to be general may be selective in practice. Thus, in the Gibraltar case4, a corporate tax reform for companies operating in Gibraltar was found to be selective because it favoured off-shore companies, even though it appeared to be applicable to all undertakings domiciled in Gibraltar. The ECJ ruled that “the fact that offshore companies are not taxed is […] the inevitable consequence of the fact that the bases of assessment are specifically designed so that offshore companies, which by their nature have no employees and do not occupy business premises, have no tax base under the bases of assessment adopted in the proposed tax reform.”5

If one of the tax measures in question constitutes State aid, it could in principle benefit from an exemption under the TFEU, but such exemptions generally apply to tax relief granted for a specific project, such as investing in disadvantaged areas or promoting culture and heritage conservation, and are limited to the costs of carrying out such projects. Most tax rulings would not likely qualify for exemption.

The tax rulings under scrutiny in the investigations opened in June concern transfer pricing agreements, which in turn influence the allocation of taxable profit between subsidiaries of a corporate group located in different countries. The general rule is that the taxation of cross-border transactions must reflect economic reality. If this condition is met, then there is no State aid (and no transfer pricing concern). If the tax authorities in effect grant a more favourable treatment to a company compared to the treatment other taxpayers would receive under the normally applicable tax system, however, this may amount to unlawful State aid.


The Commission’s decision to open three formal investigations before completing its broader inquiry into certain Member States’ tax practices may reflect frustration with the difficulty of collecting information, as suggested by the Commission’s March press release in relation to Luxembourg. The Commission has made clear that it will not wait for the conclusions of its broader inquiry to pursue potential violations involving specific companies. A failure to clear what could amount to unlawful State aid may result in lengthy Commission investigations and eventual repayment of the aid received, plus interest. Companies that have benefited from tax rulings or other special tax measures are therefore advised to assess the possibility that tax benefits negotiated as part of their European tax planning may constitute unlawful State aid. More generally, companies are reminded to take account not only of the applicable tax rules as part of their global tax planning, but also of potential State aid considerations.

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