Tax News Alert

Overview of recent state aid case law involving Luxembourg companies

Jean-Nicolas Bourtembourg,
Alain Verbeken,
Mélina Rondeux
insight featured image
Recent decisions rendered by the Court of Justice of the European Union (“CJEU”) seem to have put an end to investigations of the European Commission (“EC”) into tax measures of the Member States based on the state aid rules. In particular, certain tax rulings granted by the Luxembourg tax authority (“LTA”) to Fiat, Engie and Amazon groups have been characterised by the EC in the past as conveying illegal selective tax advantages. Ultimately, CJEU decisions rendered in these cases found the tax rulings not to constitute unlawful state aid.


The EC performed formal investigations into tax arrangements of Fiat, Engie and Amazon further to its doubts as to the compatibility of Luxembourg’s tax rulings granted to their specific group companies with the EU state aid rules. In each case, the EC relied on similar reasoning and concluded that Luxembourg had granted unlawful state aid.

Subsequent proceedings were carried out before the General Court of the European Union (“General Court”) and the CJEU, the decisions of the latter having far-reaching consequences given their final character.

The following legal background and state aid cases will be further analysed:

  1. State aid rules
  2. Fiat case (joined cases C-885/19 P and C-898/19 P)
  3. Engie case (joined cases C‑451/21 P and C‑454/21 P)
  4. Amazon case (C‑457/21 P)
  5. Our observations


State aid rules

State aid is defined by article 107 of the Treaty on the Functioning of the European Union (“TFEU”) as 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.

The EC found a number of tax rulings issued by the LTA to be incompatible with the state aid rules, on the basis that they conferred a selective advantage to the taxpayer. 

As part of the analysis of a selective tax measure, the reference system should be first identified, i.e., the “normal” tax system applicable in the concerned Member State. It should thereafter be demonstrated that the disputed measure derogates from that normal tax system. For the purposes of assessing the selective nature of a tax measure, it is, therefore, necessary that the reference system is correctly identified.


Fiat case

Summary of the facts of the case

In 2012, the LTA issued a tax ruling in favour of Fiat Chrysler Finance Europe (“FCFE”). The ruling confirmed that the transfer pricing analysis regarding the intra-group financing activity of FCFE respects the arm’s length principle.

The EC described this tax ruling as endorsing a transfer pricing method which enabled FCFE to determine its corporate income tax (“CIT”) liability in Luxembourg on a yearly basis. In particular, it contested that the ruling conferred a selective advantage on FCFE by deviating from the tax which FCFE would have been liable to pay under the ordinary CIT system, which resulted in lowering its tax liability in Luxembourg.

Decision of the CJEU

The CJEU concluded that the Commission wrongfully applied article 107 of the TFEU for the purpose of determining whether the ruling has conferred a selective advantage on FCFE, by applying an arm’s length principle different from one defined by Luxembourg law.

Namely, the EC referred to an abstract expression of the arm’s length principle without taking into account the way in which this principle has actually been incorporated into Luxembourg law (article 164(3) of the Luxembourg Income Tax Law (“LITL”) and circular no.164/2).

Even if the Luxembourg tax system applies an approach corresponding to the arm’s length principle, detailed rules applying that principle, as defined by national law, should have been taken into account in determining the reference tax system.

The General Court validated the eroneous approach of the EC in its decision. Therefore, the CJEU annulled the decision of the EC and set aside the judgment of the General Court. As shown below, this decision of the CJEU influenced other state aid cases initiated by the EC in tax matters.


Engie case

Summary of the facts of the case

In Engie case, EC investigated two sets of tax rulings concerning intra-group financing structures involving Luxembourg resident entities of the Engie group. It challenged the rulings based on inconsistencies in the treatment of the same financial instruments, being classified both in the category of debt and equity.

The tax rulings affirmed the deductibility of accrued, but unpaid charges connected with the convertible loans. On the lenders’ side, no income was recognized until the conversion of the loans into shares. At that time, the shares benefited from the participation exemption regime.

EC considered that Engie received illegal state aid through a favorable "deduction without inclusion" treatment. It argued that, under the principle of correspondence stemming from the national law, tax exemption for participation income at the parent company level should depend on the taxation of the subsidiary's profits. Additionally, EC claimed that the LTA unlawfully neglected to apply the anti-abuse rule.

Luxembourg and Engie contested the decision in the General Court, which upheld the EC's position.

Decision of the CJEU

The CJEU determined that the EC's decision inaccurately characterized the reference framework – the initial step in evaluating the presence of a selective advantage. The EC misinterpreted the LITL by alluding to the overall objective of taxing all resident companies, without thoroughly assessing the specific wording of the LITL.

Secondly, the CJEU considered that the anti-abuse rule should have been viewed in the light of its application in the national case law or administrative practice, rather than in an abstract manner.

Thus, the CJEU set aside the General Court's judgment and annulled the EC’s decision.


Amazon case

Summary of the facts of the case

In Amazon case, EC challenged two tax rulings granted to the group by the LTA in 2003. The rulings concerned the amounts of royalty payments related to the group’s Luxembourg structure. The transfer pricing analysis setting the method of calculating the rate of the royalty and the subsequent acceptance of the yearly CIT declaration based thereon were deemed to be state aid by the EC.

The Luxembourg structure consisted, among other, of a limited partnership (“LuxSCS”) which held participation in a private limited liability company (“LuxOpCo”). LuxSCS concluded several agreements with US group entities, which allowed it to sub-license the intangible assets (“IA”) to LuxOpCo. LuxOpCo thus obtained the right to use the IA in exchange for the disputed royalty payments to LuxSCS.

EC pointed out discrepancies with the arm’s length principle pursuant to the OECD Transfer Pricing Guidelines (“OECD TPG”), irrespective of the application of that principle in Luxembourg law. While the EC decided that the state aid existed, the General Court held that LuxOpCo did not benefit from an undue reduction of its tax burden.

Decision of the CJEU

On 14 December 2023, in line with its previous decisions, CJEU affirmed that the EC is obliged to rely on the domestic legislation of Member States in the application of state aid rules and the determination of selective advantage. This should not include any external rules, such as OECD TPG, unless they are explicitly integrated into or mentioned in the domestic legislation.

Therefore, the practical significance of OECD TPG depends on an explicit reference in the domestic law. As in Fiat and Engie cases, the CJEU concluded that the EC erred in determining the reference system at the initial stage.


Our observations

Based on the case law analysed above, we can observe that the EC attempted on several occasions to circumvent Luxembourg’s (and certain other Member States’) autonomy in fiscal matters by referring to the state aid rules.

It had a fairly consistent approach to the determination of the reference system, ultimately proven to be incorrect by the CJEU. Namely, the CJEU clarified that guidance and rules external to the national tax system should not be considered in the determination of the reference system, unless they are specifically referred to.

Thus, the analysed case law created limitations for any future investigations into tax rulings and other potentially unlawful state aid.

Should you have any questions about the Fiat, Engie or Amazon case, do not hesitate to reach out to the Tax team at Grant Thornton Luxembourg: