The Most Innovative Law Firm in Europe
EU State aid enquiries: What Gulfbased businesses need to know
November 2015
The European Commission has found that tax rulings given to Starbucks and Fiat breached EU State aid
rules and that the companies are each required to repay €20 – €30 million. Decisions are expected soon in
relation to Apple and Amazon. Any Gulf-owned business which has secured a favourable tax ruling in the EU
could be at risk of having to make large payments to repay tax benefits received.
Who could be affected?
The aptly named ‘Lux Leaks’ disclosures have been the biggest tax
scandal to hit the EU, especially significant as the European
Commission has been actively seeking to eliminate ‘harmful tax
practices’ within the EU.
Do you have business activities
in any European Union (EU)
countries*
Yes
Have you received a ruling from
a tax authority in an EU
country?
Yes
No
No
You should not be
currently affected
– but if in the future
you set up any
structures in the EU,
take advice on the
State aid
implications
Take advice from tax and state
aid specialists on whether you
could have a possible liability
* Austria, Belgium, Bulgaria, Croatia, Cyprus, Czech Republic, Denmark, Estonia,
Finland, France, Germany, Greece, Hungary, Ireland, Italy, Latvia, Lithuania,
Luxembourg, Malta, Netherlands, Poland, Portugal, Romania, Slovakia,
Slovenia, Spain, Sweden and United Kingdom
Background
In 2014 the European Commission launched in-depth investigations
into tax incentives given to Apple in Ireland, Starbucks in the
Netherlands and Fiat Finance and Trade and Amazon in Luxembourg.
It has now published the decisions in relation to Starbucks and Fiat,
finding that State aid rules were breached. Decisions from the
Commission in relation to Apple and Amazon are expected soon.
Shortly after these investigations were opened over 340 multinational
companies were exposed for securing secret deals from Luxembourg in
order to save billions of dollars in taxes. Hundreds of documents were
leaked that showed some companies paying an effective 1% rate of
tax on profits moved from higher tax jurisdictions to Luxembourg
through the use of private tax rulings – also known as ‘comfort letters’
or advance pricing arrangements (APAs).
In February 2015, the European Commission announced it had begun
an in-depth investigation into Belgium’s “excess profit” ruling system.
This is a Belgian tax provision that allows companies to reduce their
tax liability on the basis of the ‘excess profits’ that are said to result
from being part of a multinational group. The Commission said the
scheme could constitute State aid as it appears to only benefit
multinational groups, whilst Belgian companies only active in Belgium
cannot claim similar benefits.
Why is the European Commission investigating these deals?
Although the European Commission does not have direct authority
over national direct tax systems of EU Member States, it can
investigate whether tax incentives breach EU ‘State aid’ law.
State aid can occur whenever state resources are used to provide
assistance that gives organisations an advantage over others. It can
distort competition which is harmful to consumers and companies in
the EU and is effectively a breach of EU law. A tax ruling can be seen to
constitute an advantage as it effectively means a tax authority is
waiving a right to collect taxes otherwise due.
What are the implications of the investigation?
It will not be a defence to a State aid enquiry that rulings have been a
common arrangement, even though almost every major group will
have used a Luxembourg finance ruling as part of its overall structure.
The consequences are that companies may have to repay up to 10
years’ worth of tax benefits.
A particularly worrying aspect of the Starbucks case is that the
company appeared to have undertaken a full transfer pricing review
and to have complied with the Netherlands’ long-established and
internationally well-respected rulings process.
The European Commission has undertaken to scrutinise the papers
published as part of the ‘Lux Leaks’ disclosures meaning that hundreds
of companies risk joining Apple, Starbucks, Fiat and Amazon under the
microscope of a formal State aid investigation.
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The Most Innovative Law Firm in Europe
EU State aid enquiries: What Gulfbased businesses need to know
November 2015
There could also be serious adverse publicity if a group becomes the
subject of a formal investigation by the Commission. Such an
investigation would result in the tax affairs and planning of the group
being made public and could mean that company officials are named.
It is likely to be particularly relevant to any group that has intellectual
property, financing operations or group debt in the EU. Although all 28
Member States will be investigated, Luxembourg looks likely to remain
a particular focus of the Commission’s investigations.
The European Commission has extended its tax ruling probe to all 28
EU member states. The European Parliament has set up a special
committee to look at tax ruling practices in EU member states, going
back to 1 January 1991.
Taking action now, before an approach by the Commission, could
minimise a company’s liability and significantly reduce the risk of
adverse publicity.
What could have to be repaid?
If a ruling is found to constitute unlawful State aid, the recipient could
have to repay to the State in question the difference between the tax
charged and the tax it would have paid without the ruling. Interest is
also charged.
The amounts to be repaid could be very substantial. For example Apple
disclosed in a US Securities filing that the figure could be material and
one analyst estimated the figure at $19bn.
In repaying the aid no account is taken of the expenses a group has
incurred in setting up in a particular state or region. A group can
therefore be left seriously out of pocket as a result of a requirement to
repay State aid.
What does the future hold?
Undoubtedly the days of being able to get very favourable rulings in
EU States desperate to attract foreign investment are gone. All future
investment in the EU needs to be checked to ensure it is State aid
compliant and groups should carry out a ‘health-check’ on
past investments.
The EU is introducing automatic exchange of information on tax
rulings between tax authorities every six months. It is aiming for a
1 January 2017 start date.
There is no current proposal for making this information publicly
available but this will be kept under review – and tax campaigners in
Europe have been pushing for more and more publicly available
information about the tax affairs of multinationals.
What action should companies take?
Companies whose effective tax rate in any EU country has been
reduced by a ruling should consider the potential impact of the State
aid challenge.
With our local tax presence in the Gulf and the ability to call on our EU
state aid experts, we are ideally placed to help clients understand the
EU process as well as the potential tax issues. We can provide strategic
risk mitigation advice as well as advising on alternative tax structures
which are compliant with State aid law.
For more information please contact:
Ian Anderson
Senior Consultant
Tax
Qatar and UAE
T: +974 442 69210
M: +974 5586 2686
E: ian.anderson@pinsentmasons.com
Jason Collins
Partner
Tax
United Kingdom
T: +44 (0)20 7054 2727
M: +44 (0)7790 909079
E: jason.collins@pinsentmasons.com
Heather Self
Partner (non-lawyer)
Tax
United Kingdom
T: +44 (0)161 662 8066
M: +44 (0)7919 392006
E: heather.self@pinsentmasons.com
Caroline Ramsay
Senior Associate
State Aid
United Kingdom
T: +44 (0)20 7054 2504
M: +44 (0)7860 607027
E: caroline.ramsay@pinsentmasons.com
This note does not constitute legal advice. Specific legal advice should be taken before acting on any of the topics covered.
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© Pinsent Masons LLP 2015.
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