The CJEU handed down a highly significant judgment last week in Fiat and Luxembourg v Commission (Cases C‑885/19 P and C‑898/19 P) concerning the application of the EU state aid rules. The case concerned a 2012 tax ruling provided to Fiat Finance and Trade (FFT), a Luxembourg company which provided treasury services and financing to the Fiat Chrysler Group.
In short, the CJEU found that the Commission’s arguments were misconceived as they were not grounded in Luxembourg law. Whilst all countries have some objective basis for determining profit allocation, meaning their rules in the abstract can often be expressed as seeking ‘arm’s length’ treatment, this does not override the need to consider how that principle finds concrete expression in domestic law.
The ruling, the Commission’s decision and the GC judgment
By way of the ruling, the Luxembourg tax authority confirmed the appropriateness of the way the taxpayer used the transactional net margin method (TNMM) for determining the profit allocation to FFT. In the Commission’s decision (2015) and the GC’s judgment (2019), detailed arguments were made about the manner in which transfer pricing rules should operate. The GC confirmed that the Commission could use the ‘arm’s length principle’ to determine whether the profit allocation to FFT was appropriate and followed this up with a finding that Luxembourg had in fact departed from the arm’s length principle when granting the ruling to FFT.
The advocate general’s opinion and the CJEU judgment
The judgment was duly appealed by the taxpayer and Luxembourg and also by Ireland (whose interest in the case was far from academic given the impact that it could have on its ongoing case against the Commission in respect of the tax rulings granted by the Irish Revenue Commissioners to Apple). In a punchy opinion handed down in December 2021, Advocate General Pikamäe advised the CJEU to overturn the GC’s decision and to allow the appeal.
The CJEU agreed with the assessment of AG Pikamäe and found that the decisions of the GC and the Commission should be annulled. The court stressed that the determination of whether state aid has arisen will depend upon a comparison between the scheme for ‘normal taxation’ and that which applied to the taxpayer in question. To undertake such a comparison, it is the domestic tax rules which should be considered. Rather than using an abstract version of the ‘arm’s length principle’ for this comparison, it is hence the manner in which the arm’s length principle is expressed in the domestic rules which should be considered. The court did not stop there. It also affirmed that resorting to non-domestic rules as the Commission had done was in breach of the TFEU rules on the approximation of member state law, i.e. direct tax rules can only be harmonised in EU law where there is unanimous consent (according to TFEU article 115).
Ramifications
It cannot be overstated how significant this judgment is for the other state aid tax ruling cases, such as Apple, in that the court applied a more rigid interpretation to the scope of the domestic rules than the GC and the Commission. The CJEU held that the concrete terms of the arm’s length principle are to be derived from national law (see para 95). This finding must augur well for Ireland and Apple, as the 1991 and 2007 rulings will not be required to align with the abstract ‘arm’s length principle’. Instead, it will merely be the rules in Ireland which existed at the time which sought to ensure that there was an objective basis for determining the profits of a non-resident trading company. A successful finding for the Commission in the Amazon case is highly unlikely meanwhile, given the Commission’s apparent misconception of the scope of Luxembourg law.
Although the judgment is a blow to the Commission, the court did offer a fig-leaf (at paras 119–122), providing an example as to when state aid can be said to arise from the provision of a tax ruling. Whether the Commission has the stomach for further litigating these issues is another matter.
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The CJEU’s ruling in the Fiat state aid case
The CJEU handed down a highly significant judgment last week in Fiat and Luxembourg v Commission (Cases C‑885/19 P and C‑898/19 P) concerning the application of the EU state aid rules. The case concerned a 2012 tax ruling provided to Fiat Finance and Trade (FFT), a Luxembourg company which provided treasury services and financing to the Fiat Chrysler Group.
In short, the CJEU found that the Commission’s arguments were misconceived as they were not grounded in Luxembourg law. Whilst all countries have some objective basis for determining profit allocation, meaning their rules in the abstract can often be expressed as seeking ‘arm’s length’ treatment, this does not override the need to consider how that principle finds concrete expression in domestic law.
The ruling, the Commission’s decision and the GC judgment
By way of the ruling, the Luxembourg tax authority confirmed the appropriateness of the way the taxpayer used the transactional net margin method (TNMM) for determining the profit allocation to FFT. In the Commission’s decision (2015) and the GC’s judgment (2019), detailed arguments were made about the manner in which transfer pricing rules should operate. The GC confirmed that the Commission could use the ‘arm’s length principle’ to determine whether the profit allocation to FFT was appropriate and followed this up with a finding that Luxembourg had in fact departed from the arm’s length principle when granting the ruling to FFT.
The advocate general’s opinion and the CJEU judgment
The judgment was duly appealed by the taxpayer and Luxembourg and also by Ireland (whose interest in the case was far from academic given the impact that it could have on its ongoing case against the Commission in respect of the tax rulings granted by the Irish Revenue Commissioners to Apple). In a punchy opinion handed down in December 2021, Advocate General Pikamäe advised the CJEU to overturn the GC’s decision and to allow the appeal.
The CJEU agreed with the assessment of AG Pikamäe and found that the decisions of the GC and the Commission should be annulled. The court stressed that the determination of whether state aid has arisen will depend upon a comparison between the scheme for ‘normal taxation’ and that which applied to the taxpayer in question. To undertake such a comparison, it is the domestic tax rules which should be considered. Rather than using an abstract version of the ‘arm’s length principle’ for this comparison, it is hence the manner in which the arm’s length principle is expressed in the domestic rules which should be considered. The court did not stop there. It also affirmed that resorting to non-domestic rules as the Commission had done was in breach of the TFEU rules on the approximation of member state law, i.e. direct tax rules can only be harmonised in EU law where there is unanimous consent (according to TFEU article 115).
Ramifications
It cannot be overstated how significant this judgment is for the other state aid tax ruling cases, such as Apple, in that the court applied a more rigid interpretation to the scope of the domestic rules than the GC and the Commission. The CJEU held that the concrete terms of the arm’s length principle are to be derived from national law (see para 95). This finding must augur well for Ireland and Apple, as the 1991 and 2007 rulings will not be required to align with the abstract ‘arm’s length principle’. Instead, it will merely be the rules in Ireland which existed at the time which sought to ensure that there was an objective basis for determining the profits of a non-resident trading company. A successful finding for the Commission in the Amazon case is highly unlikely meanwhile, given the Commission’s apparent misconception of the scope of Luxembourg law.
Although the judgment is a blow to the Commission, the court did offer a fig-leaf (at paras 119–122), providing an example as to when state aid can be said to arise from the provision of a tax ruling. Whether the Commission has the stomach for further litigating these issues is another matter.
