Judgment summary
This case concerns Commission Decision (EU) 2019/421 on State aid SA.44888, which found that Luxembourg had granted unlawful State aid to the Engie group through a series of tax rulings between 2008 and 2014. The rulings endorsed a complex financing structure using interest-free loans mandatorily convertible into shares (ZORAs) to finance intra-group transfers of business activities, resulting in almost all of the profits made by the operating subsidiaries in Luxembourg escaping taxation at every level of the corporate chain.
The Commission found that the tax rulings conferred a selective advantage on the Engie group, in particular at the level of the holding companies (LNG Holding and CEF/Engie Invest International), by allowing exemption under Article 166 of the LIR of participation income which corresponded economically to amounts deducted as expenses (ZORA accretions) by the subsidiaries. The Commission relied on several lines of reasoning, including derogation from the general Luxembourg corporate income tax system, derogation from the narrower framework of Articles 164 and 166 LIR, and, in the alternative, non-application of Luxembourg's provision on abuse of law.
Luxembourg and Engie brought separate actions for annulment, raising pleas including disguised tax harmonisation, lack of an advantage, incorrect finding of selectivity, breach of procedural rights, misconstruction of the individual aid classification, and infringement of general principles of EU law regarding recovery.
The General Court, having joined the two cases for the purposes of judgment, rejected all pleas and dismissed both actions in their entirety, upholding the Commission's decision.
Background
The Engie group, comprising Engie SA (France) and companies it controls, used Luxembourg-resident companies (CEF/Engie Invest International, LNG Holding, GSTM, EIL, LNG Supply and LNG Luxembourg) to transfer business sectors relating to liquefied natural gas and to financing and treasury management (paras 4-13).
Those transfers were financed using ZORAs, interest-free loans mandatorily convertible into shares taken out by the subsidiaries (LNG Supply and GSTM) with intermediary companies (LNG Luxembourg and EIL), which in turn entered prepaid forward sale contracts with the holding companies (LNG Holding and CEF) (paras 13, 38-44).
Between 2008 and 2014, the Luxembourg tax authorities issued a series of tax rulings endorsing this structure, under which the subsidiaries were taxed only on a limited agreed margin, with the ZORA accretions treated as deductible expenses, while the intermediary companies recorded no taxable income or deductible expense in relation to the ZORAs, and the holding companies benefited from the participation exemption under Article 166 of the LIR on income corresponding to the accretions (paras 16-33).
Following a request for information in March 2015, the Commission opened a formal investigation on 19 September 2016 and adopted the contested decision on 20 June 2018, finding unlawful and incompatible State aid and ordering recovery (paras 1-2, 52-63, 97).
Core dispute
The core dispute was whether the Luxembourg tax rulings granted to the Engie group companies constituted selective State aid within the meaning of Article 107(1) TFEU. Luxembourg and Engie argued that the Commission had engaged in disguised tax harmonisation, exceeded its competence in direct tax matters, incorrectly defined the reference frameworks used to assess selectivity, wrongly found a derogation from Luxembourg tax provisions (including Articles 164 and 166 of the LIR and the provision on abuse of law), failed to demonstrate that the Engie group received preferential treatment compared with other undertakings in a comparable situation, infringed procedural rights and the obligation to state reasons, misclassified the rulings as individual aid rather than part of a scheme, and, in the alternative, that recovery of the aid infringed the principles of legal certainty and legitimate expectations.
Court findings
The Court held that the Commission was competent to examine the tax rulings under State aid law and had not engaged in disguised tax harmonisation, since it relied on Luxembourg tax law as applied by the Luxembourg tax authorities rather than imposing its own interpretation (paras 138-163).
The Court found no infringement of the obligation to state reasons, holding that the contested decision set out to the requisite legal and factual standard the reasons for finding a selective advantage (paras 168-179), and no infringement of procedural rights, since the opening decision already contained the assumptions underpinning the final decision and Engie had no right to see Luxembourg's confidential replies (paras 183-211).
The Court confirmed that the tax rulings were imputable to the State and involved State resources, since they mitigated charges normally included in a company's budget (paras 214-223).
On the substantive selectivity analysis, the Court held that the Commission had not confused the concepts of advantage and selectivity (paras 239-252). It upheld the Commission's use of a narrow reference framework comprising Articles 164 and 166 of the LIR, rejecting arguments that this framework should have been extended to cross-border situations under the parent-subsidiary directive, since the situation was purely internal (paras 270-287). The Court accepted that there was a necessary link between Articles 164 and 166 of the LIR, such that participation exemption could not apply to income not previously taxed at subsidiary level (paras 292-301).
The Court found that, although the ZORA accretions were not formally profit distributions, they corresponded in economic terms to profit distributions, and the combined effect of the deductibility of the accretions at subsidiary level and the exemption at holding company level constituted a derogation from the narrow reference framework (paras 300-327, 340-345). It rejected arguments based on the uncertainty of the ZORA's value on issue (paras 328-335) and confirmed that the Commission had established that the holding companies received preferential treatment compared with other parent companies in a comparable situation (paras 370-381).
The Court further examined, for completeness, the Commission's alternative reasoning based on the non-application of Luxembourg's provision on abuse of law, and found that all four cumulative criteria under Luxembourg law (use of private law forms, reduction in tax burden, use of inappropriate legal means, absence of non-tax related reasons) were satisfied (paras 410-463), and that the Engie group received preferential treatment as a result (paras 464-472). It rejected the argument based on freedom of establishment, noting the situation was purely internal and that, in any event, restrictions could be justified by the need to combat abuse of law (paras 473-477).
The Court held that the Commission was entitled to classify the tax rulings as individual aid without first needing to establish the existence of an aid scheme (paras 485-487), and that recovery of the aid did not infringe the principles of legal certainty or legitimate expectations, as the Commission's reasoning was not unprecedented and was based on settled State aid principles (paras 496-508).
Outcome
The General Court joined Cases T-516/18 and T-525/18 for the purposes of the judgment and dismissed both actions in their entirety. The Grand Duchy of Luxembourg was ordered to bear its own costs and pay those of the Commission in Case T-516/18. Engie Global LNG Holding Sàrl, Engie Invest International SA and Engie were ordered to bear their own costs and pay those of the Commission in Case T-525/18. Ireland, as intervener, was ordered to bear its own costs.
Major issues / areas of contention
- Whether the Commission's assessment of the tax rulings under State aid law amounted to disguised tax harmonisation exceeding its competence under Articles 4 and 5 TEU and Articles 3 to 5 and 113 to 117 TFEU.
- Whether the Commission adequately stated reasons for its finding of a selective advantage, including in relation to the provision on abuse of law.
- Whether Luxembourg's and Engie's procedural rights were infringed by the Commission's failure to adopt a new or correcting opening decision, or to disclose Luxembourg's reply of 22 March 2017 to Engie.
- Whether the tax rulings at issue were imputable to the State and involved State resources.
- Whether the Commission correctly defined the relevant reference frameworks (the general Luxembourg corporate income tax system, and the narrower framework of Articles 164 and 166 of the LIR) for assessing selectivity.
- Whether the reference framework should have been extended to include the parent-subsidiary directive and cross-border situations.
- Whether there was a derogation from Articles 164 and 166 of the LIR through the combined effect of deducting ZORA accretions at subsidiary level and exempting corresponding participation income at holding company level.
- Whether the Commission demonstrated that the Engie group received preferential tax treatment compared with other undertakings in a comparable factual and legal situation.
- Whether the criteria for a finding of abuse of law under Luxembourg law (private law forms, reduction in tax burden, inappropriate legal means, absence of non-tax related reasons) were satisfied.
- Whether prohibiting the financing arrangement as abusive would infringe freedom of establishment under Article 49 TFEU.
- Whether the tax rulings were correctly classified as individual aid rather than part of an aid scheme.
- Whether the order for recovery of the aid infringed the principles of legal certainty and the protection of legitimate expectations.