Introduction
On 8 November 2022, the European Court of Justice (‘ECJ‘) published its decision in the Fiat state aid case. The ECJ decided that the advance pricing agreement (‘APA‘) between Fiat and the Luxembourg tax authorities does not constitute forbidden state aid. With this decision, the ECJ annulled the decision of the General Court of the EU. The decision is important because it confirms that the ECJ applies a very formal legal analysis to determine whether an APA constitutes illegal state aid. The ECJ concludes that the General Court erroneously determined that Luxembourg provided Fiat with a ‘selective advantage’ while agreeing on the APA. It remains an unanswered question whether the ECJ would have decided differently if the European Commission (‘EC‘) would have demonstrated that the relevant Luxembourg tax provision (article 164 of the Luxembourg Tax Code (‘LTC‘)) resulted in a ‘selective advantage’.
What preceded the decision of the ECJ
In November 2015, the EC announced its decision that an APA between the Luxembourg tax authorities and Fiat constitutes forbidden state aid. The EC required Luxembourg to recover the illegal aid from Fiat. On 24 September 2019, the General Court of the EU ruled (in favour of the EC) that the APA indeed constitutes forbidden state aid. On 16 December 2021, Advocate-General Pikamäe concluded that the decision of the General Court should be annulled.
Relevant facts and point of view of EC
In the Fiat Case, FFT, a Luxembourg company, provided financial services, such as intra-group loans, to other Fiat group companies. The EC determined that FFT’s activities were similar to those of a bank and that as a result, FFT’s taxable profits should be calculated as a return on capital deployed by FFT for its financing activities. According to the EC, the APA artificially lowered the taxes payable by Fiat by (i) reducing the capital base of FFT to an amount that is much lower than the company’s actual capital and (ii) applying a remuneration to the amount of the reduced capital that is much lower than the market rates. The EC concluded that as a result of the APA, FFT paid taxes in Luxembourg on a very low remuneration, based on a return on only a small portion of its actual capital.
The decision of the ECJ
One of the conditions that must be satisfied for state aid is that the measure at issue confers a ‘selective advantage’ on the beneficiary. In order to classify a measure as a ‘selective advantage’, the tax measure should constitute an advantage compared to the application of the reference system and this advantage should only be available to a limited group of taxpayers. The reference system is the ‘normal’ tax system applicable in the Member State concerned.
The ECJ decided that the General Court erred in determining that the APA granted Fiat a selective advantage, as the General Court did not correctly identify the reference system. In identifying the reference system, the General Court dismissed the applicability of article 164 LTC, which is part of the ‘normally’ applicable tax system in Luxembourg. The reduction of the capital base of FFT to an amount that is much lower than the company’s actual capital is based on the application of article 164 LTC.
The error made by the General Court in identifying the correct reference system invalidates the entirety of the reasoning of the existence of a selective advantage and therefore results in setting aside the General Court’s judgement. Moreover, the General Court incorrectly concluded from the ECJ’s judgment of 22 June 2006, Belgium and Forum 187 v EC (C 182/03 and C 217/03, EU:C:2006:416) that the arm’s length principle is applicable if national tax law intends to tax integrated companies and stand-alone companies in the same way, irrespective of whether and how the arm’s length principle has been incorporated into national law.
The ECJ concludes that, in order to establish that FFT received illegal state aid, the EC should have demonstrated that article 164 LTC systematically results in an undervaluation of the transfer prices applicable to integrated, finance companies, and that this is manifestly inconsistent with the objective of nondiscriminatory taxation of all resident companies, whether integrated or not, pursued by the national tax system. The EC did not demonstrate this.
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