European Commission investigates on a potential State aid to Fiat Finance and Trade

On 30 September 2014, the European Commission (the "EC") published the non-confidential version of a decision taken on 11 June 2014 launching a formal in-depth investigation in relation to transfer pricing arrangements on corporate income taxation ("CIT") of Fiat Finance and Trade ("FFT") in Luxembourg.

In the tax administrative practice, two different kinds of rulings exist: tax rulings confirming the interpretation of a legal provision in a given situation and tax rulings related to a transfer pricing analysis confirming an economic analysis ("advance pricing agreements").

FFT is a member of the Fiat group and carries out cash pooling and intragroup financing activities for the group in Luxembourg.

In order to ascertain for tax purposes the remuneration that FFT would receive in relation to these operations, FFT had submitted an analysis to the Luxembourg direct tax authorities including a transfer pricing study prepared by an external professional adviser. The conclusions of this analysis had been confirmed by the Luxembourg direct tax authorities in an advance pricing agreement.

In its communication, the EC challenges the substance of the tax ruling by challenging the content of the transfer pricing report itself.

Indeed, the EC questions the appropriateness of the transfer pricing method chosen to calculate the taxable basis of FFT as well as the calculation itself. The EC considers that the remuneration derived from the transfer pricing does not correspond to an arm's length remuneration but that a selective advantage has been provided to FTT through the advance pricing agreement.

Consequently, the EC concludes on the existence on an unlawful State aid incompatible with the European market.

The opening of that in-depth investigation gives interested third parties and especially Luxembourg an opportunity to submit comments. Luxembourg has one month to make observations relevant to the investigation.

In the event of absence of or a non-satisfactory response from Luxembourg, the EC has a discretionary power in deciding whether or not to commence infringement proceedings and to refer the case to the Court of Justice of the European Union.

The Luxembourg's Ministry of Finance has stated that Luxembourg has submitted all information requested by the EC and fully cooperated with it in its investigation.