Tax rulings granted by Luxembourg to companies in the Engie group: the General Court finds the existence of a tax advantage
It states that preferential tax treatment is predominantly the result of the non-application of a national measure relating to abuse of law
Between 2008 and 2014, the Luxembourg tax authorities adopted two sets of tax rulings (‘the contested tax rulings’) in connection with intra-group financing structures relating to the transfer of activities between companies of the Engie group resident in Luxembourg.
In broad outline, the transactions carried out under each structure are implemented in three successive stages. First, a holding company transfers shares to a subsidiary. Secondly, in order to finance the shares transferred, that subsidiary takes out an interest-free mandatorily convertible loan (ZORA) with an intermediary. Besides the fact that the loan granted generates no periodic interest, the subsidiary that has received the ZORA repays the loan, upon its conversion, by issuing shares the amount of which is equivalent to the nominal amount of the loan, plus a premium representing, in essence, all of the profits made by the subsidiary during the term of the loan (ZORA accretions). Thirdly, the intermediary finances the loan granted to the subsidiary by entering into a prepaid forward sale contract with the holding company under which the holding company pays to the intermediary an amount equal to the nominal amount of the loan in exchange for the acquisition of the rights to the shares that the subsidiary will issue on conversion of the ZORA. Therefore, if the subsidiary makes profits during the life of the ZORA, the holding company will own the right to all the shares issued, which will incorporate the value of any profits made as well as the nominal amount of the loan.
Those structures were endorsed by the contested tax rulings. For tax purposes, under the contested tax rulings, only the subsidiary is taxed on a margin agreed with the Luxembourg tax administration. After requesting information about the contested tax rulings from the Luxembourg authorities, the Commission initiated a formal investigation procedure at the end of which it determined that the result of the structures approved by the tax administration is that almost all of the profits made by the subsidiaries established in Luxembourg have not been taxed. Consequently, in a decision adopted in 2018 (‘the contested decision’), the Commission concluded that the contested tax rulings constitute illegal State aid that is incompatible with the internal market, which must be recovered from the recipients by the Luxembourg authorities.
Luxembourg (Case T-516/18) and the Engie group companies (Case T-525/18) brought an action for annulment of the contested decision before the General Court of the European Union.