On 7 March 2019, the European Commission announced the opening of a formal State aid investigation into three tax rulings granted by the Luxembourg tax authorities to a Luxembourg entity of the Finnish Huhtamäki group. The tax rulings allowed a Luxembourg borrower to impute an arm’s length interest expense on an interest-free debt.
Under EU State aid rules, Member States are not allowed to grant a selective advantage that may distort competition by favouring certain undertakings. This new investigation focuses on transfer pricing: it questions the imputation of a deemed interest expense on an interest-free debt at the level of the Luxembourg borrower, whereas there is no corresponding upward adjustment of the tax base at the level of the Irish lender.
The Huhtamäki group had a Luxembourg-based group financing company. This company has received an interest free loan from an Irish group company, but claims a downward adjustment of its tax base through deduction of deemed interest expense. Luxembourg considers that this unilateral adjustment reflects the arm’s length interest that would have been charged by the lender under market-based conditions. Based on its press release, accessible here, the Commission is concerned that Luxembourg’s acceptance of the unilateral downward adjustment may grant the company a selective advantage.
The opening of a formal investigation does not prejudge the final outcome of the case. The Commission will now examine whether the unilateral downward adjustment of the Luxembourg borrower’s tax base is justified under EU State aid rules. The Commission’s interpretation of the arm’s length principle under EU State aid rules in other recent State aid decisions, including Apple, Starbucks, Fiat and Amazon, is at the same time subject to appeal before the Court of Justice of the EU. Luxembourg, the Luxembourg company that obtained the investigated tax rulings and interested third parties will have the opportunity to submit comments on the Commission’s decision.
More formal investigations into tax rulings in several EU Member States are still expected to be opened. There are also pending formal investigations concerning IKEA (in the Netherlands), Nike (the Netherlands) and the CFC financing exception scheme in the United Kingdom.