Luxembourg: EC investigation of tax rulings, issued to US multinational

The European Commission today announced its decision to launch a “state aid” investigation into tax rulings granted by the tax authorities in Luxembourg to a company that is a member of a U.S.-based multinational taxpayer group.

Background

According to a February 2015 report, in 2008-2009, the group transferred its European intellectual property and franchising rights to a Luxembourg entity—a company with branches in both Switzerland and the United States. The Luxembourg company received €3,708 million royalties during the period 2009-2013 and paid what has been described as “hardly any corporate income tax” in Luxembourg for that same period.

A first tax ruling granted by the Luxembourg authorities in 2009 confirmed that the Luxembourg company was not liable for corporate tax in Luxembourg on the grounds that the profits were to be subject to taxation in the United States. This position was justified by reference to the Luxembourg-United States income tax treaty. However, according to the EC, the profits were not subject to tax in the United States.

A second tax ruling granted later in 2009 provided that income of the Luxembourg company was not subject to tax in Luxembourg even if it were confirmed that the income was not subject to tax in the United States. According to the EC, the Luxembourg tax authorities, thus, exempted almost all of the Luxembourg company’s income from taxation in Luxembourg.

The EC found the royalties received by the Luxembourg company were transferred internally to the U.S. branch—a branch that did not have any real activities.

KPMG observation

The focus of the EC investigation, thus, appears to be about the mismatch in the tax treatment of the U.S. branch of the Luxembourg company by Luxembourg and the United States (and not so much on the justification for the allocation, of the royalties received, to the U.S. branch). However, it appears that transfer pricing and profit allocation within the taxpayer group could ultimately become relevant for the state aid investigation.

This taxpayer is the fourth U.S. multinational whose tax rulings with an EU Member State have become the subject of an EU state aid investigation, reflecting the EC’s interpretation and application of the transfer pricing principle for state aid cases.

Read a December 2015 report prepared by the KPMG member firm in the Netherlands: The European Commission launches another State Aid investigation into Luxembourg tax rulings