The Court annulled the Commission’s decision ordering Luxembourg to recover €30 million in unpaid taxes from Fiat as it found that the Commission’s analysis of Luxembourg’s reference system and, by extension, its conclusion as to the existence of a selective advantage granted to Fiat, was erroneous (joined cases C-885/19 P and C-898/19 P).
On 8 November 2022, the Grand Chamber of the Court of Justice (the “Court”) set aside the judgment delivered by the General Court of the EU (the “General Court”) in joined cases T-755/15 and T-759/15 and annulled the Commission’s decision of 21 October 2015 on the state aid amounting to €30 million allegedly granted by Luxembourg to Fiat (joined cases C-885/19 P and C-898/19 P).
Background
On 3 September 2012, the Luxembourg tax authorities adopted a tax ruling in favour of Fiat Chrysler Finance Europe (“FCFE”), an undertaking of the Fiat group that provides treasury services and financing to Fiat companies established in Europe. The tax ruling at issue approved a methodology for determining FCFE’s remuneration for those services that enabled that undertaking to determine its corporate income tax liability to Luxembourg on a yearly basis. In a decision of 21 October 2015, the Commission found that the tax ruling constituted unlawful and incompatible state aid, in contravention of the provisions of Articles 107 and 108 TFEU. The Commission thus ordered Luxembourg to recover the aid from FCFE.
Luxembourg and FCFE each lodged an appeal before the General Court seeking an annulment of the Commission’s decision. In a judgment of 24 September 2019, the General Court dismissed these actions for annulment, confirming the validity of the Commission’s decision. In their respective appeals, Fiat and Ireland requested that the General Court judgment be set aside.
The Court’s reasoning
The Court set out to assess whether the condition of the measure conferring a selective advantage on the beneficiary, which constitutes one of the four conditions required in order to classify a national measure as “state aid” under the TFUE, was met in the case at hand. In the area of taxation, the examination of that condition involves, as a first step, the identification of the reference system, in other words the “normal” tax system applicable in the Member State concerned. The second step requires a demonstration that the tax measure at issue constitutes a derogation from that reference system, in the sense that it differentiates between operators who are in comparable factual and legal situations, without justification with regard to the nature of the reference system.
In its assessment of whether the Commission erred in the first step of the analysis of the selectivity condition, namely the identification of the reference system, the Court pointed out that, outside the spheres in which EU tax law has been harmonised, it is the Member State concerned that determines the characteristics constituting the tax, by exercising its exclusive competence in the area of direct taxation.
According to the Court, the Commission erred in law in deciding that, in the case of a tax system which pursues the objective of taxing the profits of all resident companies, whether integrated or stand-alone (as was the case in Luxembourg), the application of the OECD’s arm’s length principle – according to which “transactions between intra-group companies are remunerated as if they had been agreed to by independent companies negotiating under comparable circumstances” – for the purposes of applying Article 107 TFEU, is justified, irrespective of whether that principle has been incorporated into national law. On the contrary, as Luxembourg had argued, the Commission should have taken into account the specific way in which said principle had been incorporated into Luxembourg law with regard to integrated companies in particular.
The Court therefore found that, by endorsing the Commission’s approach, the General Court had failed to realise that it is the national law applicable in the Member State concerned that should be taken into account exclusively in order to identify the reference system. By accepting that the Commission may rely on rules that are not part of Luxembourg law, even though the Commission did not have the power to define the “normal” taxation of an integrated company autonomously, the General Court’s judgment also infringed the treaty provisions relating to the adoption of EU measures for the approximation of Member State legislation relating to direct taxation.
The Court concluded that the grounds of the General Court’s judgment under appeal relating to the Commission’s line of reasoning, according to which the tax ruling at issue derogated from the Luxembourg reference system, are vitiated by an error of law. The Court therefore set aside the judgment under appeal and, giving final judgment in the matter, annulled the Commission’s 2015 decision at issue.
The Court added that Member States’ actions in areas that are not subject to EU harmonisation, such as direct taxation, are not excluded from the scope of the treaty provisions on state aid. This means that tax rulings granted by Member States may constitute state aid measures within the meaning of Article 107 TFUE, as the Commission had been claiming. However, the Commission has an obligation to prove that the state measure at hand constitutes state aid, in that it presents all four classifying conditions identified by the case law of the Court, which it had failed to do in this case.
Please contact Pierre de Bandt or Jeroen Dewispelaere for further information about this case and/or for general legal advice relating to state aid law.