Judgment summary
This case concerns two joined appeals against a General Court judgment that had upheld a European Commission decision finding that a 2012 Luxembourg tax ruling issued to FFT constituted unlawful State aid under Article 107(1) TFEU. The Commission had found that the ruling conferred a selective advantage on FFT by allowing it to reduce its taxable profits in a manner departing from the arm's length principle.
The Court of Justice held that the Commission erred in law by applying an arm's length principle that did not derive from a full examination of the relevant Luxembourg national tax law, in particular Article 164(3) of the Tax Code and Circular No 164/2, which specifically applied to group financing companies such as FFT (paras 90 to 105).
The Court found that only national law applicable in the Member State concerned can be used to identify the reference system for direct taxation purposes, and that the Commission cannot rely on a hypothetical or autonomous arm's length principle divorced from how that principle is actually incorporated into national law (paras 71 to 74, 96).
As a result, the Court set aside the General Court's judgment and, giving final judgment itself, annulled the Commission's decision at issue in its entirety (paras 113, 117, 124).
Background
On 14 March 2012, FFT's tax adviser requested an advance transfer pricing agreement from the Luxembourg tax authorities (para 3). On 3 September 2012, the Luxembourg tax authorities issued a tax ruling confirming that FFT's transfer pricing analysis complied with Circular 164/2 of 28 January 2011 and respected the arm's length principle (para 4).
The Commission began investigating Luxembourg's tax ruling practices from 19 June 2013, and on 11 June 2014 initiated a formal investigation procedure under Article 108(2) TFEU regarding the FFT tax ruling (paras 5 to 6).
On 21 October 2015, the Commission adopted Decision (EU) 2016/2326, finding that the tax ruling conferred a selective advantage on FFT by lowering its tax liability compared to what would have been paid under the ordinary Luxembourg corporate income tax system, or alternatively under Article 164(3) of the Tax Code and Circular No 164/2 (paras 7, 15 to 23). The decision ordered recovery of the aid, held binding for the 2012 to 2016 tax years (para 24).
FFT and the Grand Duchy of Luxembourg brought actions for annulment before the General Court, with Ireland intervening in support. On 24 September 2019, the General Court dismissed both actions, upholding the Commission's approach to the arm's length principle as a tool for assessing State aid under Article 107(1) TFEU independent of its incorporation into national law (paras 25 to 36).
Core dispute
The central issue was whether the Commission and the General Court correctly identified the 'reference system' or 'normal' taxation applicable in Luxembourg for the purpose of assessing whether the FFT tax ruling conferred a selective advantage under Article 107(1) TFEU.
Ireland, supported by Luxembourg and FFT, argued that the arm's length principle applied by the Commission was an autonomous EU law concept not grounded in Luxembourg's actual national tax rules, in particular disregarding Article 164(3) of the Tax Code and Circular No 164/2, which contained specific rules for group financing companies such as FFT (paras 56 to 58).
The Commission contended that the General Court had correctly endorsed its comparison between FFT's tax treatment and that of a stand-alone company under the general Luxembourg corporate income tax system, relying on the judgment in Belgium and Forum 187 v Commission as supporting an arm's length benchmark inherent in Article 107(1) TFEU (paras 59 to 64).
Court findings
The Court of Justice held that determination of the reference framework for assessing selectivity in tax matters must follow from an objective examination of the content, structure and effects of the applicable rules under the national law of the Member State concerned, and that only national law is relevant to that determination (paras 72 to 74).
The Court found that the Commission, by dismissing the relevance of Article 164(3) of the Tax Code and Circular No 164/2, applied an arm's length principle different from that actually defined by Luxembourg law, confining itself to an abstract expression of the principle rather than examining how it had been incorporated into national law for integrated companies (para 91).
The General Court's endorsement of this approach failed to take account of the requirement that the Commission carry out a comparison with the tax system normally applicable in the Member State, and thereby erred in law in the application of Article 107(1) TFEU (para 92).
The Court also found that the General Court, by accepting that the Commission could rely on rules not part of Luxembourg law, infringed the FEU Treaty provisions on approximation of Member State legislation on direct taxation, in particular Article 114(2) TFEU and Article 115 TFEU (para 94).
The Court further held that the judgment in Belgium and Forum 187 v Commission did not support the proposition that the arm's length principle applies irrespective of how it has been incorporated into national law; in that earlier case the Court had relied on the specific Belgian legislative mechanism at issue (paras 102 to 104).
The Court also rejected the Commission's argument that its subsidiary line of reasoning (based on Article 164(3) of the Tax Code and Circular No 164/2) could sustain the decision independently, finding that this subsidiary reasoning referred back in full to the same flawed principal analysis and did not remedy the error (paras 109 to 112).
Outcome
The Court of Justice set aside the General Court's judgment of 24 September 2019 in Luxembourg and Fiat Chrysler Finance Europe v Commission (T‑755/15 and T‑759/15) (para operative point 2).
Giving final judgment itself, the Court annulled Commission Decision (EU) 2016/2326 of 21 October 2015 on State aid SA.38375 (2014/C ex 2014/NN) which Luxembourg granted to Fiat (operative point 3).
The Court declared that there was no need to adjudicate on FFT's separate appeal in Case C‑885/19 P (operative point 4). Each party was ordered to bear its own costs in Case C‑885/19 P, while the Commission was ordered to pay the costs of the appeal in Case C‑898/19 P and the costs of the proceedings at first instance (operative points 5 to 7).
Tp method highlighted
The Luxembourg tax ruling was based on a transfer pricing analysis endorsing a method for allocating profit to FFT within the Fiat/Chrysler group, issued under Article 164(3) of the Luxembourg Income Tax Code and Circular L.I.R. No 164/2 of 28 January 2011, which laid down the arm's length principle under Luxembourg tax law for intra-group financing companies (paras 10 to 11).
The Commission referenced the OECD Transfer Pricing Guidelines, which list five methods for approximating arm's length pricing, and considered that only the comparable uncontrolled price method and the transactional net margin method were relevant to the case (paras 12 to 13).
The Court of Justice found that the Commission's assessment failed to take into account the specific detailed rules for applying the arm's length principle as set out in Article 164(3) of the Tax Code and Circular No 164/2, particularly those concerning the calculation of transfer prices for group financing companies, including that activities related to the holding of participations should not be taken into account in that calculation (para 98).
Major issues / areas of contention
- Whether the General Court erred in endorsing the Commission's identification of the reference system for assessing selectivity of the FFT tax ruling under Article 107(1) TFEU.
- Whether the arm's length principle applied by the Commission was properly grounded in Luxembourg national law, specifically Article 164(3) of the Tax Code and Circular No 164/2, or was an autonomous EU law standard.
- Whether the judgment in Belgium and Forum 187 v Commission supported the existence of an arm's length principle applicable independently of its incorporation into national law.
- Whether the Commission's subsidiary line of reasoning based on Article 164(3) of the Tax Code and Circular No 164/2 could independently sustain the finding of a selective advantage.
- Whether the Commission's approach amounted to harmonisation of direct taxation rules in breach of Articles 4 and 5 TEU and Article 114 TFEU, and the Member States' fiscal autonomy.
- Whether the alleged error in determining the reference system vitiated the entirety of the selectivity analysis.