Final nail in the State aid coffin? Fiat/Chrysler: First CJEU judgment on tax rulings and State aid
The CJEU this week handed down its much-awaited judgment on the European Commission’s State aid decision ordering Fiat to pay back EUR 30m in tax to Luxembourg. The landmark judgment marks a pivotal moment for the EC’s high-profile crusade against alleged “sweetheart tax deals” granted to multinationals. The ruling is another bruising setback for the EC and will force the authority to reconsider whether State aid is an appropriate tool to tackle what the EC perceives as unfair tax competition between EU Member States.
The EC’s Tax Crusade
The EC started its high-stake wave of investigations into tax rulings granted by EU Member States in 2013. According to the EC, these tax rulings have led to companies such as Apple, Starbucks and Amazon paying less taxes on profits generated in the EU. The EC, spearheaded by Commissioner Vestager, riled against alleged unfair advantages and classified several of these tax rulings as illegal State aid.
The cases have sparked much controversy. Across the pond, both former U.S. President Donald Trump and Apple CEO Tim Cook have provided strong views, with Cook calling it “political crap” and Trump slamming Vestager as a US-hating “tax lady”.
All the EC’s decisions have been appealed. In the judgments to date, the GC, the EU’s first instance court has confirmed that the EC was right to pursue these cases, despite the fiscal autonomy of the Member States. In its Apple judgment, the GC concluded: “…instances of intervention by the Member States in the field of direct taxation, even if they concern issues that have not been harmonised in the European Union, are not excluded from the scope of the rules on State aid control”. At the same time, several of these judgments - including in Apple, Amazon and Starbucks – resulted in major setbacks for the EC as the Court overturned the EC’s decisions, placing a high evidentiary burden on the EC.
This week’s CJEU (Grand Chamber) judgment presents the first opportunity for the EU’s highest court to join the debate. For this reason, the ruling was eagerly awaited by many. As we explain in this post, the CJEU sides with the GC and confirms that the EC can take on these cases under State aid rules. However, it also confirms that the burden for proving that the tax deal actually gives rise to a “selective advantage” lies with the EC, and that it is essential to respect the Member State’s fiscal sovereignty when determining what the “normal” tax rate is.
The Fiat decision
The relevant tax ruling was adopted by the Luxembourg tax authority in 2012. It confirmed a method for profit allocation within the Fiat / Chrysler group, based on a transfer pricing analysis in application of the “arm’s length principle”. Under this principle, and for tax purposes, transactions between intra-group companies are to be priced the same way as transactions between independent companies.
The EC disagreed with the Luxembourg authorities that the methodology used did not lead to a result which was in line with the arm’s length principle. This resulted in a beneficial outcome / advantage for Fiat and the EC concluded that the tax ruling gave rise to illegal State aid.
Both Fiat and Luxembourg appealed the EC decision to the GC, and Ireland intervened. The GC upheld the EC’s decision, resulting in both Fiat and Ireland appealing to the CJEU.
AG: “Undue interference” in Member States’ tax powers
In December 2021, Advocate General Pikamäe issued his opinion. Pikamäe disagreed with the EC’s use of a particular version of the arm’s length principle developed by the OECD in its transfer pricing guidelines as the relevant benchmark. The variant of the arm’s length principle had not been incorporated in Luxembourg’s tax law at the time. Against this background, Pikamäe found an “undue interference in the Member States’ tax autonomy”. Pikamäe therefore concluded that the CJEU should quash the GC’s decision.
Another one bites the dust! The EC disavowed again, this time by CJEU
The CJEU aligned with Pikamäe and overturned the lower court’s judgement.
First, and importantly, the CJEU, like the GC and the Advocate General, reaffirmed the EC in its powers to investigate tax rulings under State aid rules. It restated the established principle that State measures in matters falling outside EU harmonisation are not excluded from the scope of application of State aid rules.
However, the CJEU soundly debunked the EC’s method of determining the “normal tax system” for the purposes of establishing if a tax measure is “selective” or part of that normal tax system. The CJEU stressed the importance for the EC to get this benchmark right as it otherwise voids the entire analysis that follows.
The CJEU concluded that only the Member State’s national law should be considered to determine this relevant benchmark. Doing otherwise would mean that “the autonomy of a Member State in the field of direct taxation […] cannot be fully ensured”. This is a very important statement of principle.
According to the CJEU, the EC failed to properly consider the arm’s length principle as set out in national law. Instead, it relied on OECD principles which had never been incorporated into Luxembourg law. This effectively sidestepped the Member State’s national sovereignty as regards to defining the arm’s length principle, and it should be interpreted and applied. Accordingly, the CJEU found that there was not only a breach of State aid rules by the GC and the EC, but also, and perhaps more importantly, of the Treaty provisions that exclude harmonisation of tax. The CJEU thus upheld Ireland’s appeal of the GC judgment and annulled the EC’s decision.
Next steps: back to the drawing board?
The ruling is likely to have implications for a host of other tax ruling cases. Coming next is the EC’s appeal against the GC’s annulment of its Apple decision. In addition, the EC is still formally investigating several tax ruling cases, such as against Ikea, Nike and Huhtamäki. Furthermore, this ruling may also signal the end of a trend. In several State aid appeals, such as the Belgian Excess Profit cases, the CJEU had been the one cutting the EC some slack, while the GC set aside the EC’s decisions. This week’s judgment may indicate the EC has used up the CJEU’s grace.
Following this week’s setback, the EC has reasons to be gloomy about the prospects of winning the upcoming Apple judgment and future cases in the pipeline. It remains to be seen what the EC’s next move will be: taking stock to find a route towards more robust legal and economic analyses in State aid cases? A doubling down on its efforts to adopt measures to tackle unfair taxation relying on its limited powers in taxation? The stakes at play are high, and there’s a vociferous public opinion pushing for multinationals to pay their “fair share” of taxes, so Commissioner Vestager and the Brussels accolade are unlikely to simply throw in the towel, despite this week’s defeat in court.