The compatibility of “sweetheart” tax deals with EU state aid laws

United Kingdom

This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.

This article was originally posted on Olswang's Tax Blog on 31 December 2014.

In response to media reports alleging significant tax reductions by way of "sweetheart" tax deals from various EU Member State taxation authorities, the European Commission has launched a number of in-depth investigations to review their compatibility with EU state aid rules. The arrangements currently under investigation are between Apple and Ireland, Starbucks and the Netherlands, as well as between each of Amazon and Fiat and Luxembourg. The new corporate tax regime in Gibraltar has also been in focus.

Should the Commission decide that any of these tax rulings amount to state aid there are likely to be serious financial repercussions. With the new European Commissioner for Competition's remit specifically stated to include the "fight against tax evasion", it is likely that further investigations will follow.

What is state aid?

According to EU Law, any aid granted by a Member State which confers a selective economic advantage to a particular recipient or group of recipients - such as an individual company or industry sector - which distorts or threatens to distort competition within the internal market and affects trade between Member States will be incompatible with the EU's internal market ("State Aid"). It is settled law that State Aid includes relief from taxation which would otherwise be payable. The immediate question for the Commission is whether or not tax deals under investigation fall into this category.

EU law requires Member States to notify to the Commission any financial measure which may constitute State Aid before any such measures are actually put in place. Before a Member State can proceed with its plans, the Commission must determine whether or not the proposed measure constitutes State Aid and, if so, whether or not the State Aid is compatible with the internal market. State Aid implemented before the Commission's decision is unlawful and State Aid found to be incompatible with the internal market is prohibited by EU law.

What is the current situation?

The Commission's investigations concern tax rulings validating transfer pricing agreements, also known as advance pricing arrangements ("APAs"). The internationally agreed standard for transfer pricing is the "arm's length principle" which provides that intra­group transactions should be made on the same basis as if the transaction were between independent companies. Where the method of taxation for intra­group transfers has not complied with the arm's length principle, this may cause the company to have a lower taxable basis than other companies in a similar situation and so could be considered to have provided a selective advantage to that company. The Commission is investigating whether the measures imposed by Ireland, the Netherlands, Luxembourg and Gibraltar (which were not notified to the Commission prior to implementation) constitute unlawfully granted State Aid.


The in-depth investigation into Amazon relates to transfer pricing arrangements. The European Commission is investigating a 2003 tax ruling setting a tax deductible royalty that Amazon EU Sàrl pays to a limited liability partnership established in Luxembourg, which is not subject to Luxembourg corporation tax. This royalty reduces the taxable profits of Amazon EU Sàrl, and the Commission is concerned that the measure may not be in line with market conditions (in particular the ruling contains an agreement to limit the proportion of Amazon's turnover that is taxed in Luxembourg, whatever the profit that Amazon is making). The Commission is investigating whether the tax ruling provides a selective economic advantage to Amazon by allowing the group to pay less tax than other companies.


According to the Commission's preliminary analysis of the two separate tax rulings granted to Apple by the Irish tax authority in 1991 and 2007, Ireland may well have underestimated Apple's taxable profit resulting in Apple paying less tax and so granted Apple an economic advantage not available to other companies. In particular, the Commission appears to be concerned about:

  • the length of time APAs are in force. In most EU countries APA's tend to last for an average of 3­5 years. This is in direct contrast with the 1991 Apple­-Ireland APA which contained no expiry date and appeared to have been in force until the 2007 ruling was issued;
  • the negotiation of tax rulings, as distinct from the terms being substantiated by reference to comparable transactions;
  • the appropriateness of the transfer pricing method chosen (where a method has been used); and
  • inconsistencies in the application of the transfer pricing method chosen.


The European Commission investigation into Fiat relates to transfer pricing concerns. The Commission's investigation centres on a five year agreement between Luxembourg and Fiat which agreed an upfront sum on which Fiat would pay approximately 10% tax compared to the standard tax rate of 28.8%. Furthermore the agreement did not provide for adjustments to be made over the 5 year period.


The European Commission suspects that the Dutch authorities allowed Starbucks to shrink its taxable income, in particular through paying a royalty for a coffee­-roasting recipe. This royalty fluctuates from year to year but such fluctuations do not relate to the output, sales or profit of Starbucks.

Gibraltar corporate tax regime

This investigation concerns the way in which tax rulings are issued, as they do not appear to be made on the basis of sufficient information or proper evaluation necessary to ensure that tax is paid in line with that paid by other companies. The European Commission is examining whether such tax rulings therefore selectively favour certain companies.

Potential outcomes

There is no legal deadline for concluding in-depth investigations and it can take the Commission up to 18 months to reach a decision in State Aid investigations. Having said this, Margrethe Vestager, the European Commission's competition chief, has stated that the Commission's current open cases may "be finalized" by Spring 2015.

If the Commission determines that any of the tax arrangements being investigated constitute unlawful State Aid incompatible with the internal market, the Commission will require the Member State which granted the Aid either to abolish or to alter it. To give effect to this that Member State would have to take measures to recover the amount of State Aid granted, plus interest. The financial impact of such a finding should not be underestimated - the limitation period for recovery is 10 years from the grant of the State Aid, meaning that companies in receipt of incompatible State Aid could be required to repay up to a decade's­ worth of tax benefit plus interest. There will be no escape for companies pleading financial hardship - repayment of Aid is required even if such repayment will result in insolvency. Recipients of incompatible State Aid may also be subject to damages claims brought against them by competitors and other affected third parties seeking compensation for loss suffered as a result of EU law infringement.

Redress may not be available to recipients of unlawful State Aid. Recipients might consider the potential to challenge the validity of State Aid recovery decisions and perhaps even seek redress by way of legitimate expectation arguments. Both the recipient and the Member State have the right to appeal the Commission's decision, but this will not normally delay the required repayment of State Aid while the appeal progresses.

In the event that the Commission concludes that certain tax arrangements do not constitute State Aid, or alternatively that tax arrangements constitute State Aid compatible with the internal market, the companies benefiting from the tax arrangements will not be required to make any repayments. In this event related investigations could be closed without liability for the recipients.

Who should be concerned?

Companies that have agreed a position with HMRC in which HMRC exercised discretion may find that they are vulnerable to a State Aid challenge. Settlement agreements and rulings should be reviewed carefully in order to assess exposure to challenge.

Companies focused on the digital economy may not have a requirement for a physical presence in a country in order to reach customers there. This provides them with freedom to move profits and intellectual property to benefit from tax advantages. Such behaviour is something that has been highlighted as a focus for enforcement action, following the OECD BEPS action on addressing the tax challenges of the digital economy and country specific comments including the UK's Chancellor of the Exchequer; George Osborne's "Google Tax".

How will this affect your company?

In the current climate, State Aid investigations into "sweetheart" tax deals are unlikely to go away. Whether your company will be affected depends upon individual circumstances. You should review any arrangements in place with national tax authorities and consider whether such arrangements may be providing your company with an advantage not available to others. In particular, be wary of deals made for longer than 5 years and any tax rulings tailored specifically to your company. If you think there is cause for concern, then you should consider whether you can document the methodologies and comparables used to support the transfer pricing used - remembering that any action taken should be carried out under lawyer­-client privilege. You should also be careful of any future arrangements, as going forward new arrangements are likely to be subject to close scrutiny.