Antitrust

S H E A R M A N & S T E R L I N G L L P | 1 2 7 Organization for Economic Co-operation and Development's (OECD) base erosion and profit shifting (BEPS) project, which is a much more coherent way to tackle tax avoidance strategies that exploit gaps and mismatches in tax rules than State aid. The frustration, however, was expressed by Commissioner Vestager, who noted "the fact remains that McDonald's did not pay any taxes on these profits — and this is not how it should be from a tax fairness point of view." However, she has got her way indirectly. Luxembourg has already tabled draft legislation to amend its tax code to bring the relevant provision into line with the BEPS project to prevent future double non-taxation. THE LUXEMBOURG/ENGIE CASE Engie had established intra-group financing structures involving its subsidiaries in Luxembourg, which enabled two companies, LNG Supply S.A. (LNG Supply) and GDF Suez Treasury Management S. à r. l. (GSTM) (each a 'Relevant Company') to pay corporate tax at an effective tax rate of 0.3%. T H E A R R A N G E M E N T W A S E N D O R S E D B Y L U X E M B O U R G I N A S E R I E S O F T A X R U L I N G S According to the EC, the financing structure was similar in both cases. A convertible loan was provided by an Engie lender subsidiary to a Relevant Company (via an intermediary). The Relevant Company used the loan to justify making deductions from its taxable profits, which reduced its tax burden. However, the Relevant Company did not in fact make any interest payments under the loan to justify the deductions. The Relevant Company retained its profits until Engie converted the loan, at which point the profits passed to the Engie lender subsidiary (via the intermediary) in the form of shares. The Engie lender subsidiary later cancelled the shares and instead received the value of the profits in cash, which is exempted from tax under Luxembourg law. This arrangement was endorsed by Luxembourg in a series of tax rulings. The EC's in-depth investigation found that the tax rulings endorsed tax treatment that allowed for a reduction of the tax base of the Relevant Companies in Luxembourg, such that they paid lower tax on their profits. The EC found this amounted to more favorable treatment than would otherwise be the case under the general rules of taxation; therefore, Engie received a selective advantage that amounted to State aid. The EC has ordered Luxembourg to recover from Engie €120 million in unpaid taxes (plus interest). The decision has been appealed by Luxembourg. 1. Case T-207/10, Deutsche Telekom v. Commission (EU:T:2018:786), Case T-227/10, Banco Santander v. Commission (EU:T:2018:785), Case T-239/11, Sigma Alimentos Exterior v. Commission (EU:T:2018:781), Case T-405/11, Axa Mediterranean v. Commission (EU:T:2018:780), Case T-406/11, Prosegur Compañia de Seguridad v. Commission (EU:T:2018:793), Case T-219/10, RENV World Duty Free Group v. Commission (EU:T:2018:784) and Case T-399/11, RENV Banco Santander and Santusa Holding v. Commission (EU:T:2018:787). CONTINUED >

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