Advocate General calls on CJEU to annul Engie and Amazon state aid decisions

Amazon case

On 4 October 2017, the EU Commission ("Commission") decided that Luxembourg had granted Amazon unauthorised State aid of about EUR 250 million through a tax ruling which was confirming the arm's length nature of the deductible royalty payments by a Luxembourg operating company to a tax transparent Luxembourg partnership.

On 12 May 2021, this decision was annulled by the General Court considering that the Commission relied on an incorrect analysis (mainly erroneous functional analysis and selection of tested party) and was not able to sufficiently demonstrate the existence of a selective advantage.

An appeal was lodged by the Commission against the judgment of the General Court before the European Court of Justice ("CJEU").

In an opinion of Advocate General ("AG") Kokott delivered on 8 June 2023 (Case C-457/21 P), it is reminded that in assessing the existence of a selective advantage, the identification of the reference system is key and in this specific case, the Commission relied exclusively on the guidelines provided by the OECD, whereas Luxembourg law did not refer to these guidelines at the date of the tax ruling. As such, the AG Kokott was of the view that the Commission erred in deciding that Luxembourg had granted unauthorised State aid to Amazon in the form of tax advantages because "the reference system (the OECD Transfer Pricing Guidelines instead of Luxembourg law) relied on by the Commission was incorrect".

Engie Case

On 20 June 2018, the Commission found that Luxembourg had granted the Engie group unlawful State aid in connection with restructuring operations in Luxembourg by means of various tax rulings issued by the Luxembourg tax authorities confirming the tax treatment of convertible zero-interest coupon issued by two Luxembourg group subsidiaries ("Subsidiaries") to two other Luxembourg companies of the group's ("Holdings"). On the one hand, the borrowers took deductions from their profits equal to the accretions on the zero interest loan (i.e. variable component, equivalent to the profits made by the Subsidiaries) but on the other hand, no equivalent interest income inclusions were made at the level of the Holdings. The loan and accretions were later converted into equity and paid to the Holdings with the gains exempted under the participation exemption regime. According to the Commission, (i) the rulings endorsed an inconsistent treatment of the same amounts, both as debt and equity and (ii) a selective advantage was conferred as a result of the non-application of national provisions relating to abuse of law.

On 12 May 2021, the General Court fully endorsed the Commission's view and dismissed the actions brought by Engie and Luxembourg, who subsequently lodged an appeal before the CJEU.

In an opinion delivered on 4 May 2023 (Case C-454/21 P), AG Kokott suggests that the CJEU uphold the appeals and annul the Commission decision.

In her view, the Commission and the General Court proceeded on the basis of an incorrect reference framework. They erred in law in assuming a principle of correspondence, according to which a tax exemption for participation income at the level of the Holdings is contingent on taxation of the underlying profits at the level of the Subsidiaries. "The EU institutions cannot use State aid law to shape some ideal tax law".

Furthermore, AG Kokott pushes for a restricted standard of review in respect of tax law decisions taken by the tax authorities that is limited to a plausibility check: "That will mean that not every error in the application of national tax law is evidence of a selective advantage. Thus, only the manifest derogation in favour of the taxpayer of a tax ruling (or tax assessment) from the reference framework encompassing the national tax law can constitute a selective advantage. In the absence of such a manifest derogation, the tax assessment may be unlawful, but a possible derogation from the reference framework does not by itself mean that it constitutes State aid within the meaning of Article 107 TFEU". The same reasoning applies to the question of abuse of law, which according to AG Kokott, almost always presents difficulties of interpretation. Therefore, "the standard of review for assessing the application of [ abuse of law ] rules for compliance with State aid law must certainly be reduced to a pure plausibility check".

Finally, it is worth noting that AG Kokott recalled that tax rulings do not, per se, constitute illegal State aids: "they are an important instrument for creating legal certainty […]. Tax rulings are therefore unproblematic in terms of State aid law as long as they are open to all taxpayers (usually upon request) and – like any other tax assessment – are in line with the relevant tax law".

The CJEU should rule in the coming months in both cases.