Amazon wins the tax dispute over the EU Commission

The EU Commission suffers a defeat in court in the fight against supposedly illegal tax advantages of digital corporations. The energy company Engie, on the other hand, has to pay taxes.

The Amazon logo at a logistics center in Boves, France

Dhe tax rules that the Luxembourg state has concluded with the Internet retailer Amazon do not violate EU state aid law. The decision of the EU Commission issued in 2017 to force Luxembourg to reclaim state aid in favor of the group is therefore void and must be reversed. With this decision, the EU court in Luxembourg has once again prevented the Brussels competition authority’s attempt to prevent alleged tax breaks in favor of individual digital companies using state aid law.

Previously, the court had already conceded the Commission’s decision to require the Irish state to reclaim around 13 billion euros from Apple. The court had also conceded a commission decision, which was directed against similar tax rules in Belgium.

In the Amazon case, the Commission decided in 2017 that Luxembourg would have to reclaim around 250 million euros plus interest from Amazon. The Grand Duchy had granted the company illegal tax breaks, as a result of which almost three quarters of Amazon’s profits were not taxed, the EU authority had ruled at the time. Specifically, it concerns a tax model practiced from 2006 to 2014, which was approved by the Luxembourg authorities. It enabled Amazon to offset advance payments made in the company in such a way that the tax liability of the Luxembourg taxable operating company Amazon EU, which is responsible for the retail business throughout Europe, remained as low as possible.

The Luxembourg tax assessment stipulated that Amazon EU paid a high license fee to a holding company that was not taxable in Luxembourg. As a result, much of Amazon EU’s taxable profit has been consumed. According to the commission, the holding company – as a company without employees and business premises – was “nothing but an empty shell”. The tax ruling, which is only valid for Amazon, meant that the company paid significantly less taxes than other companies. Competition Commissioner Margrethe Vestager said at the time that the Commission’s decision only aimed at the selective effect of the special decision.

The court is now denying this selective effect. The Commission did not provide sufficient legal evidence that the subsidiary’s tax burden was wrongly reduced.

Engie has to pay 120 million

In a second, similar tax case, however, the court ruled the commission on Wednesday. Their decision in 2018 that Luxembourg had to reclaim tax benefits of 120 million euros from the French Engie Group is lawful according to the EGC. The Commission rightly accused the Grand Duchy of improperly selective tax treatment of Engie.

The stumbling block were two tax rulings from 2008 with which the Luxembourg authorities unilaterally approved two “complex financing structures” created by Engie (formerly EDF-Suez). These artificially reduced the company’s tax burden. Certain of Engie’s profits in Luxembourg have thus been taxed at an effective tax rate of only 0.3 percent.

The Engie daughters had therefore granted each other interest-free loans. The borrowers had been able to reduce their taxable profits by deducting interest payments as expenses, while the lender’s income was valued as equity compensation. As a result, the same transactions were classified once as equity and once as debt for tax purposes, the Commission had complained about. No tax at all was paid on a significant part of the profits that EDF-Suez made in Luxembourg.

The court rejected the Luxembourg objection that the EU Commission had no right to influence national tax law. If national legislation favors individual companies in such a way that the internal market is distorted, the Commission is entitled to intervene. The fact that the court found the Commission right in the Amazon case can evidently – unlike in the Engie case – be explained by errors of law.