On 10 January 2019, the European Commission announced the opening of a formal State aid investigation into five tax rulings granted by the Dutch tax authorities to two Dutch entities of the Nike group between 2006 and 2015. This investigation concerns individual tax rulings and as such should not directly impact other taxpayers. Nonetheless, the investigation forms part of the Commission’s continuing efforts focusing on transfer pricing and valuation issues.
Under EU State aid rules, Member States are not allowed to grant a selective advantage that may distort competition by favouring certain undertakings. This new investigation focuses on transfer pricing: it questions the arm’s length nature of the royalty payments made by the two Dutch operating entities (OpCos) to two Dutch tax-transparent partnerships owning certain IP rights relating to products sold by the OpCos. As the royalty payments are tax deductible, the OpCos’ taxable amount is only a margin, which the Dutch tax authorities considered at arm’s length. The partnerships are not taxed in the Netherlands.
Based on its press release, accessible here, the Commission’s doubts arise from the potential non-alignment between the profit allocation and the substance of the respective entities. The partnerships “have no employees and do not carry out any economic activity” whereas the OpCos have more than 1,000 employees, perform IP-related functions, and carry out and bear the costs of marketing and sales activities. The Commission’s reasoning, not yet published, may in this respect follow a similar path as in the Amazon (see our flash of 26 February 2018) and IKEA cases (see our flash of 18 December 2017).
The opening of a formal investigation does not prejudge the final outcome of the case. The Commission will now look in depth at whether the transfer pricing method accepted by the Dutch tax authorities to determine the royalty payments are at arm’s length. The Commission’s interpretation of the arm’s length principle under EU State aid rules in other recent State aid decisions, including Apple, Starbucks, Fiat and Amazon, is at the same time subject to appeal before the Court of Justice of the EU. The Netherlands, the OpCos and interested third parties will have the opportunity to submit comments on the Commission’s decision.
More cases investigating individual tax rulings in several EU Member States are still expected to be opened. There are also pending formal investigations concerning IKEA (in the Netherlands) and the CFC financing exception scheme in the United Kingdom.
Compliments of Loyens & Loeff, a member of the EACCNY