By decision of 4 October 2017, the Commission found that Luxembourg had granted incompatible State aid to Amazon through an advance tax ruling in 2003.
In this tax ruling, the Luxembourg tax administration had expressed its opinion on the appropriate amount of a royalty between two Luxembourg subsidiaries of the Amazon group. The amount of the royalty affects the corporate income tax payable by Amazon, which is domiciled in Luxembourg. The higher the royalty, the less corporate income tax will ultimately be payable in Luxembourg.
Amazon agreed on a methodology to determine the appropriate royalty. This transfer pricing agreement was considered by the Commission as aid because it did not comply with the arm’s length principles of the OECD.
The Commission carried out its own calculation of the appropriate royalty based on a different methodology and arrived at a lower royalty. As this would have resulted in a higher corporate income tax burden, the tax ruling would have conferred a selective advantage to the subsidiary paying the royalty.
Following this finding by the Commission, the case was referred to the CJEU. By judgment of 12 May 2002, the General Court annulled the Commission’s decision. Based on the OECD guidelines, the General Court could not find that the transfer prices had been incorrectly determined. The Commission did not prove that the tax burden was artificially reduced as a result of an overvaluation of the royalty.
At the appeal stage, the opinion of the Advocate General was sought, and he found that:
- The Advocate General proposes that the Court should dismiss the Commission’s appeal and, consequently, uphold the judgment of the General Court annulling the Commission’s decision on the merits, even though he does not agree with the grounds of that judgment.
- In that regard, the Court of Justice held in Fiat Chrysler Judgement that, in order to assess the existence of a selective tax advantage and to determine the tax burden which should normally be borne by an undertaking, parameters and rules external to the national tax system in question cannot be taken into account, unless the latter expressly refers to those parameters and rules.
- Since the Commission based its analysis on the OECD guidelines and not on Luxembourg national law (which does not even refer to the OECD guidelines), the Commission’s decision is legally flawed.
