UK and International Tax news

The General Court Finds For EC In Investigation Into Tax Rulings Granted To Nike In The Netherlands

Friday 16th July 2021

The General Court of the EU has recently dismissed action brought against the EC’s decision to initiate formal investigations into Nike and Converse in the Netherlands.

In 2019, the EC opened an in-depth investigation to examine whether tax rulings granted by the Netherlands tax authorities to Nike may have given the company an unfair advantage over its competitors, in breach of EU State aid rules.

The EC’s formal investigation concerned the tax treatment in the Netherlands of two Nike group companies based in the Netherlands, Nike European Operations Netherlands BV and Converse Netherlands BV. These two operating companies developed, marketed and recorded sales of Nike and Converse products in Europe, the Middle East and Africa.

Nike European Operations Netherlands BV and Converse Netherlands BV obtained licenses to use intellectual property rights relating to, respectively, Nike and Converse products in the EMEA region. The two companies obtained the licenses, in return for a tax-deductible royalty payment, from two Nike group entities.

From 2006 to 2015, the Dutch tax authorities issued five tax rulings endorsing a method to calculate the royalty to be paid by Nike European Operations Netherlands and Converse Netherlands for the use of the intellectual property.  As a result of the rulings, the two companies were only taxed in the Netherlands on a limited operating margin based on sales.

The EC was concerned that the royalty payments endorsed by the rulings did not reflect economic reality and appeared larger than what independent companies negotiating on market terms would have agreed between themselves in accordance with the arm’s length principle.

Nike and Converse asked the General Court to annul the EC’s decision and put forward arguments alleging breach of the obligation to state reasons, manifest errors of assessment and non-compliance with procedural rights.

In its judgment, the General Court did not accept any of the arguments put forward and dismissed the action in its entirety. The Court noted that the decision to initiate the formal investigation procedure brought to a close the preliminary examination stage.  The Commission’s subsequent assessment of the measures at issue was not definitive and could evolve during the formal procedure for obtaining additional information from the Netherlands and any interested parties.

Any appeal, limited to points of law only, may be brought before the Court of Justice against the decision of the General Court within two months and ten days of notification of the decision.

If you would like further information on the above, please contact Keith Rushen on 0207 486 2378.

 

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