The EC argued that both rulings “did not reflect economic reality” and, thus, amounted to state aid. The tax ruling at issue endorsed a particular method for determining FFT’s remuneration for these services. In Fiat, the EC took issue with a Luxembourg tax ruling in favor of an undertaking in the Fiat group that provided treasury and financing services to the group companies established in Europe (FFT). Residual profit was determined by deducting SMBV’s remuneration, under the APA, from SMBV’s total operating profit. Specifically, the APA provided that the amount of the royalty to be paid to Alki would correspond to SMBV’s residual profit. In addition, the APA endorsed the amount of the royalty paid by SMBV to Alki, another entity of the group, for the use of Starbucks’ coffee roasting intellectual property. Thereafter, SMBV’s remuneration served to determine annually its taxable profits on the basis of Netherlands corporate income tax. The objective of that arrangement was to determine SMBV’s remuneration for its production and distribution activities within the group. In Starbucks, the EC pursued a Dutch advance pricing arrangement (APA) with Starbucks Manufacturing EMEA BV (SMBV), part of the Starbucks group. Tax rulings inconsistent with the ALP, in the EC’s view, confer a selective advantage on integrated companies over stand-alone companies (who transact under market conditions) and may result in illegal state aid under EU law. The EC viewed the tax rulings as state aid because they allegedly endorsed an artificial methodology for the calculation of taxable profits which “did not reflect economic reality.” The EC maintained that in application of the state aid prohibition in Article 107(1) of the Treaty on the Functioning of the EU (TFEU), intragroup transactions should be remunerated as if they were agreed by independent companies operating under market conditions, in compliance with the arm’s length principle (ALP).

In its decisions, both issued in October 2015, the EC concluded that Luxembourg and The Netherlands granted a selective advantage in favor, respectively, of Starbucks and Fiat, by issuing tax rulings which artificially lowered the corporate tax that the two companies paid as compared with the liability calculated under the ordinary rules.

It may therefore take a few more years for additional legal certainty to emerge on these issues.

The judgments may still be overturned by the Court of Justice (CJEU).

They also give further arguments to companies currently involved in appeal or investigation proceedings.

These judgments significantly raise the bar for the EC to prove the existence of an advantage granted to a tax ruling beneficiary.

The EC had failed this test in its Starbucks decision, which was annulled, while the Fiat decision was upheld. The EC cannot merely point at methodological deficiencies regarding the grant of the ruling, but must also demonstrate that the alleged error by the member state led to an outcome outside an arm’s length range.

The EC has the burden of proof that a tax ruling gives rise to an advantage, i.e., that the tax ruling resulted in a reduction of the tax burden compared to the situation absent the ruling.

The EC is entitled to use the arm’s length principle as a “tool” or “benchmark” to investigate whether a tax ruling gives rise to a selective advantage under state aid rules.

While member states have autonomy in direct taxation matters, national tax laws should still comply with EU law, including state aid law.

The General Court confirmed the EC’s powers to examine whether tax rulings by member states confer state aid.

Key Points of the Starbucks and Fiat Judgments 2 This week’s judgments, in contrast, for the first time clarify the court’s thinking on the substantive state aid assessment of tax rulings, which has given rise to controversy in recent years. That judgment was based on the purely procedural ground that the EC should have analyzed each individual “excess profit” ruling and could not rely on a holistic analysis at the level of the scheme.

1 This follows the General Court’s decision earlier this year to annul the EC’s decision that the Belgian “excess profit” ruling regime amounted to a state aid scheme. On September 24, 2019, the EU General Court (General Court) issued its long-awaited judgments in relation to the appeals brought against two European Commission (EC) decisions of 2015 concluding that tax rulings granted by The Netherlands and Luxembourg conferred illegal state aid on Starbucks and Fiat, respectively.

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