European Union State Aid Investigations

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Since June 2013, the European Commission (Commission) has been investigating the tax ruling practices of European Union member states, and in December 2014 it extended this information inquiry to all member states. During these investigations, the Commission analyzed whether tax rulings granted selective advantages to specific companies. Article 107(1) of the Treaty on the Functioning of the European Union (TFEU) defines state aid 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 shall, in so far as it affects trade between Member States, be incompatible with the internal market.”

Tax Rulings

The concept of state aid, with respect to tax rulings, continues to be at the forefront of international tax discussions. (See OECD BEPS Action 5 final report, Countering Harmful Tax Practices More Effectively, Taking Into Account Transparency and Substance.) Tax rulings are intended to establish, in advance, the application of the tax system to a particular case in view of its specific facts and circumstances. For reasons of legal certainty, many national tax authorities provide administrative rulings on the future tax treatment of specific transactions. This may be done to establish in advance how a bilateral tax treaty or national fiscal provisions will be applied to a particular case or how “arm’s-length profits” will be set for related-
party transactions.

Tax rulings confer a selective advantage when (1) the ruling misapplies national tax law and this results in lower tax; (2) the ruling is not available to transactions that have a similar legal and factual situation; or (3) the administration applies a more favorable tax treatment compared with other taxpayers in a similar factual and legal situation.

State Aid Investigations

In mid-2014, the Commission opened three formal state aid investigations on tax rulings granted by Ireland (to Apple), Luxembourg (to Fiat), and the Netherlands (to Starbucks). Additional investigations were opened in 2015 on tax rulings granted by Luxembourg (to Amazon and McDonald’s) and by Belgium (the excess profit scheme).

Following in-depth investigations, the Commission concluded that Luxembourg, the Netherlands, and Ireland granted selective tax advantages to Fiat, Starbucks, and Apple, respectively. In each case, the respective national tax authority issued a tax ruling that artificially lowered the tax paid by the relevant company.

EU state aid rules require that incompatible state aid be recovered to reduce the distortion of competition that the aid creates. Therefore, the Commission has ordered Luxembourg, the Netherlands, and Ireland to recover the unpaid tax from Fiat, Starbucks, and Apple, respectively, to remove the unfair competitive advantage that each has received and to restore equal treatment with other companies in similar situations.


Fiat Finance and Trade (FFT), based in Luxembourg, provides financial services, such as intragroup loans, to other Fiat group car companies. It engages in many different transactions with Fiat group companies in Europe.

The Commission’s investigation showed that a tax ruling that Luxembourg authorities issued in 2012 gave a selective advantage to FFT, which reduced its tax burden since 2012 by between €20 and €30 million. As a result, FFT has paid taxes on only a small portion of its actual accounting capital at a very low remuneration. If the taxable profits are calculated based on capital, the level of capitalization in the company must be adequate compared with financial industry standards. Also, the remuneration applied must correspond to market conditions. The Commission’s assessment showed that in the case of FFT, if the estimations of capital and remuneration applied had corresponded to market conditions, the taxable profits declared in Luxembourg would have been twenty times higher.


Starbucks Manufacturing EMEA BV (Starbucks Manufacturing), based in the Netherlands, is the only coffee roasting company in the Starbucks group in Europe. It sells and distributes roasted coffee and coffee-related products (e.g., cups, packaged food, pastries) to Starbucks outlets in Europe, the Middle East, and Africa.

The Commission’s investigation showed that a tax ruling that the Dutch authorities issued in 2008 gave a selective advantage to Starbucks Manufacturing, reducing its tax burden since 2008 by €20 to €30 million.

The ruling artificially lowered taxes Starbucks Manufacturing paid in two ways: (1) Starbucks Manufacturing pays a very substantial royalty to Alki (a U.K.-based company in the Starbucks group) for coffee-roasting knowhow; and (2) it pays an inflated price for green coffee beans to Switzerland-based Starbucks Coffee Trading Company Sàrl.

The Commission’s investigation established that the royalty that Starbucks Manufacturing paid to Alki cannot be justified, because it does not reflect market value adequately. The amount of the royalty effectively shifted a large part of Starbucks Manufacturing’s taxable profits to Alki, which is not liable for paying corporate tax in the U.K. or in the Netherlands. Furthermore, the investigation revealed that Starbucks Manufacturing’s tax base was also reduced by the highly inflated price that it pays for green coffee beans to Starbucks Coffee Trading Company Sàrl.


Following an in-depth state aid investigation launched in June 2014, the Commission concluded that tax rulings that Ireland issued to Apple Operations Europe (AOE) and Apple Sales International (ASI) significantly reduced the tax that Apple paid in Ireland since 1991. The Commission said that the rulings endorsed a way to establish taxable profits that did not correspond to economic reality, as almost all sales profits that the companies recorded were attributed internally to a “head office.” The Commission said its assessment showed that these “head offices” existed only on paper and could not have generated such profits, and the profits allocated to the “head offices” were not subject to tax in any country. As a result, Ireland must now recover unpaid taxes of up to €13 billion, plus interest, from Apple for the years 2003 to 2014.

Karl Soukup, state aid general scrutiny and enforcement director in the Commission’s General-Directorate for Competition, said that the issue of stateless income was irrelevant to the Apple decision on state aid. In addition, this decision was not based on whether Apple was complying with Irish tax law, but whether Ireland was granting Apple an unfair advantage over other companies operating within its borders.

Jessica Silbering-Meyer, JD, MBA, is managing editor/author with Thomson Reuters Checkpoint within the Tax & Accounting business of Thomson Reuters.

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