On December 3, 2015 the European Commission announced its decision to launch a State Aid investigation into tax rulings granted by Luxembourg.

The announcement of the European Commission

The case concerns a Luxembourg company which received royalties. These royalties were transferred internally to a foreign branch of the Luxembourg company, a branch which according to the European Commission did not have any real activities. The European Commission provided the following details on the rulings. A first tax ruling given by the Luxembourg authorities in 2009 confirmed that the Luxembourg company was not due to pay corporate tax in Luxembourg on the grounds that the profits were to be subject to taxation in the foreign jurisdiction. This was justified by reference to the Double Taxation Treaty concluded between Luxembourg and the foreign jurisdiction. However, contrary to the assumption of the Luxembourg tax authorities when they granted the first ruling, the profits were not to be subjected to tax in that foreign jurisdiction While under the proposed reading of Luxembourg law, the Luxembourg company had a taxable presence in the foreign jurisdiction, it did not have any taxable presence in the foreign jurisdiction under the law of that jurisdiction. The Luxembourg authorities issued a second tax ruling later in 2009 according to which the income of the Luxembourg was not subject to tax in Luxembourg even if it was confirmed not to be subject to tax in the foreign jurisdiction either. According to the European Commission, the Luxembourg tax authorities as a result accepted to exempt almost all of the Luxembourg company’s income from taxation in Luxembourg.

Observations by Meijburg & Co

In this specific case the focus of the European Commission appears to be on the mismatch in the tax treatment of the foreign branch of the Luxembourg company and not so much on the justification of the allocation of the royalties received to the branch. It is not clear whether this is a change in the tactics of the European Commission. We would expect the State Aid investigation to focus on the transfer pricing policy and profit allocation applied.

Click here to open the memorandum in pdf-format