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European Court Finds in Favour of Amazon in State Aid Case

Friday 14th May 2021

The General Court of the European Union has found no selective advantage in favour of a Luxembourg subsidiary of the Amazon group in a recent State aid case brought by the European Commission.

In Cases T-816/17 Luxembourg v Commission and T-318/18 Amazon EU Sàrl and Amazon.com Inc v Commission, the General Court has annulled the European Commission’s earlier decision that there was an undue reduction of the tax burden of a European subsidiary of the Amazon group.

From 2006, Amazon pursued its commercial activities in Europe through two companies established in Luxembourg (1) LuxSCS – a Luxembourg limited partnership, the partners of which were US entities of the Amazon group, and (2) LuxOpCo – a wholly owned subsidiary of LuxSCS.

Between 2006 and 2014, LuxSCS held intangible assets necessary for the Amazon group’s activities in Europe. It concluded various licence and assignment agreements with US entities of the Amazon group for pre-existing IP with Amazon Technologies Inc, and an agreement for the sharing of costs linked to the development of the IP. Under the agreements, LuxSCS obtained the right to exploit certain IP assets including technology, customer data and trademarks, and to sub-licence those assets to LuxOpCo, as the principle operator of the Amazon group’s business in Europe. Under the licence agreement, LuxOpCo undertook to pay a royalty to LuxSCS in return for the use of the intangible assets.

In November 2003, on a request from the Amazon group, the Luxembourg tax authorities granted a tax ruling in respect of the tax treatment of LuxOpCo and LuxSCS. In particular, the ‘arm’s length’ royalty to be paid by LuxOpCo to LuxSCS should be calculated according to the transactional net margin method using LuxOpCo as ‘the tested party’. The tax ruling confirmed that LuxSCS was not subject to Luxembourg corporate income tax because of its legal form and endorsed the method of calculating the annual royalty to be paid by LuxOpCo to LuxSCS.

In 2017, the EC found, in so far as it had endorsed the ‘arm’s length’ nature of the method of calculating the royalty to be paid by LuxOpCo to LuxSCS, that the tax ruling and its annual implementation from 2006 to2014 constituted State aid for the purpose of Article107TFEU, which was incompatible with the internal market. More specifically, the EC found the royalty paid by LuxOpCo to LuxSCS during the relevant period was too high, with the result that LuxOpCo’s remuneration and its tax base were artificially reduced.

In addition, having found that the tax ruling had been implemented by Luxembourg without having been notified to the EC in advance, the EC ordered the recovery from LuxOpCo of that aid which was unlawful and incompatible with the internal market.

Luxembourg and the Amazon group each brought an action seeking the annulment of that decision. In their actions, they contested each of the findings on which the EC based its reasoning as regards the existence of an advantage.

In its judgment, the GCEU has upheld the applicants’ pleas and arguments and has annulled the contested decision in its entirety on the basis that none of the findings set out by the EC were sufficient to demonstrate the existence of an advantage for the purposes of Article 107(1) TFEU.

 

If you would like more detail on this decision, please contact Keith Rushen on +44 (0)20 7486 2378.

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