Competition: state aid

Fiat Chrysler Finance Europe, formerly Fiat Finance and Trade Ltd (‘FFT'), is part of the Fiat/Chrysler automobile group and provides treasury and financing services to the Fiat/Chrysler group companies established in Europe. With its head office located in Luxembourg, FFT had requested from the Luxembourg tax authorities approval of an advance transfer pricing agreement. Following that request, the Luxembourg tax authorities issued a tax ruling endorsing a method for the determination of FFT's remuneration, as an integrated company, for the financial services provided to other Fiat/Chrysler group companies, which enabled FFT to determine its corporate income tax liability to the Grand Duchy of Luxembourg on a yearly basis.

By decision of 21 October 2015 [1] (‘the decision at issue'), the Commission found that that tax ruling constituted operating aid incompatible with the internal market within the meaning of Article 107 TFEU. Moreover, it found that the Grand Duchy of Luxembourg had not notified it, in accordance with Article 108(3) TFEU of the plan relating thereto and therefore had not complied with the standstill obligation laid down in Article 108(3) TFEU. Accordingly, the Commission ordered the recovery of that unlawful and incompatible aid.

The Grand Duchy of Luxembourg and FFT both brought an action for the annulment of that decision. In dismissing those actions, [2] the General Court upheld, in particular, the Commission's approach, according to which, in the case of a tax system which pursues the objective of taxing the profits of all resident companies, whether integrated or not, the application of the arm's length principle for the purposes of defining the reference system is justified independently of whether that principle has been incorporated into national law.

Hearing two appeals, brought this time by FFT and Ireland, the Court of Justice, sitting as the Grand Chamber, sets aside the judgment of the General Court, then, giving final judgment in the matter, also annuls the decision at issue. In that context, it provides further clarification as to whether tax rulings granted by the tax authorities of the Member States endorsing methodologies for determining transfer pricing may constitute State aid within the meaning of Article 107(1) TFEU.

Findings of the Court

As a preliminary point, the Court recalls that, in the context of the analysis of tax measures from the perspective of EU State aid law, the examination of the condition relating to selective advantage involves, as a first step, identifying the reference system, that is the ‘normal' tax regime applicable in the Member State concerned, then demonstrating, as a second step, that the tax measure at issue is a derogation from that system, in so far as it differentiates between economic operators which, in the light of the objective pursued by that system, are in a comparable factual and legal situation, without finding any justification with regard to the nature or scheme of the system in question.

More specifically, the determination of the reference system, which must be carried out following an exchange of arguments with the Member State concerned, must follow from an objective examination of the content, the structure and the specific effects of the applicable rules under national law and, outside the spheres in which EU law has been harmonised, it must be done, as is the case for direct taxation, solely in the light of the national law applicable in the Member State concerned. It is the Member State concerned which determines, by exercising its own competence in the matter of direct taxation and with due regard for its fiscal autonomy, the characteristics constituting the tax, which define, in principle, the reference system or the ‘normal' tax regime, from which it is necessary to analyse the condition relating to selectivity. This includes, in particular, the determination of the basis of assessment and the taxable event.

It is in the light of those considerations that the Court of Justice examines whether, in the present case, by endorsing the Commission's methodology, the General Court erred in law in determining the reference system.

In the first place, the Court of Justice specifies that the question whether the General Court adequately defined the relevant reference system and, by extension, correctly applied a legal test, such as the arm's length principle, is a question of law which can be reviewed by the Court of Justice on appeal.

In the second place, the Court of Justice finds that, when defining the reference system in order to determine whether the tax ruling at issue confers a selective advantage on its beneficiary, the Commission did not carry out a comparison with the tax system normally applicable in the Member State concerned, following an objective examination of the content, interaction and concrete effects of the rules applicable under the national law of that State. It applied an arm's length principle different from that defined by Luxembourg law, confining itself to identifying the abstract expression of that principle in the objective pursued by the general system of corporate income tax in Luxembourg, and to examining the tax ruling at issue without taking into account the way in which the said principle has actually been incorporated into that law with regard to integrated companies in particular.,

It follows that, first, by endorsing such an approach, the General Court erred in law in the application of Article 107(1) TFEU and, second, by accepting that the Commission may rely on rules which are not part of Luxembourg law, it infringed the provisions of the FEU Treaty relating to the adoption by the European Union of measures for the approximation of Member State legislation relating to direct taxation, in particular Article 114(2) TFEU and Article 115 TFEU.

In that regard, the Court notes, first of all, that, without harmonisation in EU law in that regard, any fixing of the methods and criteria for determining an ‘arm's length' outcome falls within the discretion of the Member States. It follows that only the national provisions are relevant for the purposes of analysing whether transactions must be examined in the light of the arm's length principle and, if so, whether or not transfer prices, which form the basis of a taxpayer's taxable income and its allocation among the States concerned, deviate from an arm's length outcome.

Next, the Court notes that the Grand Duchy of Luxembourg laid down specific rules for determining an arm's length remuneration for intra-group financing companies, such as FFT, which were not however taken into account by the Commission in its analysis of the reference system and, by extension, of the existence of a selective advantage granted to FFT.

Last, the Court specifies that, contrary to what the General Court held at first instance, the judgment of 22 June 2006, Belgium and Forum 187 v Commission, [3] does not support the position that the arm's length principle is applicable where national tax law is intended to tax integrated companies and stand-alone companies in the same way, irrespective of whether, and in what way, that principle has been incorporated into that law. In that case, it was in the light of the rules on taxation laid down in the relevant national law, namely Belgian law, that the Court concluded that it was appropriate to use the arm's length principle.

Having regard to the foregoing, the Court sets aside the judgment under appeal, considers that the state of the proceedings so permits and, giving final judgment in the matter, annuls the decision at issue in so far as the error committed by the Commission in determining the rules actually applicable under the relevant national law and, therefore, in identifying the ‘normal' taxation in the light of which the tax ruling at issue had to be assessed invalidates the entirety of the reasoning relating to the existence of a selective advantage. The Court of Justice finds in particular that the setting aside of the judgment of the General Court on account of the error of law committed by the latter cannot be avoided on account of the fact that the Commission also included in the decision at issue, as a subsidiary point, a line of reasoning based on Article 164(3) of the Luxembourg Tax Code and the related Circular No 164/2. The Court of Justice holds that that line of reasoning merely refers to the Commission's principal analysis of the correct reference system, so that it rectifies only in a superficial manner the Commission's error in the identification of the reference system that should have formed the basis of its analysis relating to the existence of a selective advantage.

[1] Commission Decision (EU) 2016/2326 of 21 October 2015 on State aid SA.38375 (2014/C ex 2014/NN) which Luxembourg granted to Fiat (OJ 2016 L 351, p. 1).

[2] Judgment of 24 September 2019, Luxembourg and Fiat Chrysler Finance Europe v Commission (T-755/15 and T-759/15, EU:T:2019:670).

[3] Judgment of 22 June 2006, Belgium and Forum 187 v Commission (C-182/03 and C-217/03, EU:C:2006:416).