On 8 November 2022, in the case Luxembourg and Fiat Chrysler Finance Europe v Commission, the Court of Justice of the European Union (the Court) annulled the judgment of the General Court as well as the decision of the Commission that had decided that Luxembourg had granted unlawful State aid to Fiat. The Court ruled that the reference system used by the Commission to determine the existence of a selective advantage was incorrect.
The full text of the decision (joined cases C-885/19 P and C-898/19 P) is available here.
In 2012, the Luxembourg tax authorities granted a tax ruling in favour of a Luxembourg subsidiary (FFT) of the Fiat group, which confirmed a transfer pricing methodology to determine the remuneration to be realised by FFT for financing and treasury services rendered to the group. The Commission considered that such a ruling, which confirmed a profit allocation to FFT and enabled the group to control its corporate income tax liability in Luxembourg, constituted illegal State aid.
The question at hand was whether the tax ruling granted to Fiat was illegal State aid incompatible with the internal market of the European Union, as previously confirmed by the General Court.
In this respect, the Court analysed the required conditions for characterising unlawful State aid, with a focus on the appreciation of the selective advantage. It ruled that, for the purposes of the analysis regarding the selectivity of a tax measure, the only applicable reference system which must be identified and tested by the Commission is the domestic tax system applicable in the relevant State. Since, in the case at hand, the Commission based its State aid decision on its own interpretation of the arm’s length principle and did not take into account the transfer pricing framework applicable under Luxembourg law, the Court annulled the Commission decision as well as the judgment of the General Court confirming the analysis made by the Commission.
The Court also specified that, according to the principle of the legality of taxation, OECD rules and guidelines are not legally binding (and thus cannot be used by the Commission to justify unlawful State aid) as long as they are not incorporated into domestic law. As regards transfer pricing rules in particular, the Court added that it is a matter for the Member States only to determine any required or acceptable methods as well as the criteria for arm’s length principle and profit allocation purposes.
This long-awaited decision is more than welcome for taxpayers and transfer pricing practitioners. It may also influence the outcome of several pending cases as well as Commission investigations relating to transfer pricing and State aid rules involving multinational companies. The Commission will now have to review its analysis of selectivity for State aid purposes based on the guidance given by the Court.
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