European Union: The Increasing Link Drawn By Regulators Between State Aid & Taxation Systems

In 2018, the European Commission (EC) concluded two more investigations into whether the tax ruling practices of Member States breached European Union (EU) State aid rules: the first, a finding of unlawful State aid resulting from tax rulings by Luxembourg in favor of Engie; the second, a rare finding of no aid in respect of the treatment by Luxembourg of McDonald's under the Luxembourg-U.S. double taxation treaty. These decisions are discussed below.

The Increasing Link Drawn by Regulators Between State Aid & Taxation Systems

The EC also had a success in the General Court, which ruled in a series of cases that the EC was right to find that a particular measure for the amortization of financial goodwill under the Spanish tax regime was selective in nature and amounted to incompatible State aid.1


State aid is defined as an advantage in any form (including tax measures) conferred on a selective basis to businesses by public authorities. General measures open to all businesses do not constitute State aid. Since tax rulings are available to any tax payer who needs them they are not a problem per se; however, where they — or any other taxation measure — result in favorable treatment vis-a-vis the general taxation regime, they will fall foul of the State aid rules. Navigating this distinction in practice is difficult especially for tax rulings which are by definition individual.


The Luxembourg-U.S. double taxation treaty provided that Luxembourg cannot tax the profits of a company that can be taxed in the U.S. by virtue of them having a 'permanent establishment.' McDonald's Europe Franchising — a Luxembourg based corporation with two branches, one in the U.S. and one in Switzerland — received royalties from franchisees using the McDonald's brand in Europe, Russia and Ukraine. The Swiss branch licensed the franchise rights and the royalty profits were sent from Luxembourg to the U.S. branch.

Under Luxembourg tax law, the U.S. branch was considered a 'permanent establishment,' so its revenues could not be taxed by Luxembourg. However, under U.S. tax law the same branch was not considered a 'permanent establishment,' meaning the profits from the royalties were not subject to taxation in the U.S. either. Luxembourg granted tax rulings in favor of McDonald's Europe Franchising, which confirmed the profits were not taxable in Luxembourg, while removing any obligation to prove that they were taxable in the U.S., with the effect that McDonald's paid no tax on certain royalty payments.

The EC opened an in-depth State aid investigation to assess whether the tax rulings gave McDonald's a selective advantage by derogating from the provisions of national tax law and the Luxembourg-U.S. double taxation treaty. However, the EC's investigation found that "the reason for double non-taxation in this case is a mismatch between Luxembourg and US tax laws, and not a special treatment by Luxembourg. Therefore, Luxembourg did not break EU State aid rules."

This decision is significant because it is the first time that an EC investigation into alleged aid by virtue of tax rulings by a Member State has resulted in a finding of no aid. However, the outcome that McDonald's will not pay tax anywhere on these revenues is unpalatable for the EC since opposing aggressive tax avoidance was a big part of the motivation for and communication strategy around the EC's case against Apple's Irish tax treatment for example. The EC's approach does show some belated deference to the 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.


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. a r. l. (GSTM) (each a 'Relevant Company') to pay corporate tax at an effective tax rate of 0.3%.

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.


The general Spanish tax regime only allowed for the amortization of goodwill for tax purposes in the event of mergers. The Spanish government subsequently introduced a measure that enabled companies resident in Spain for tax purposes to treat as tax deductible the amortization of financial goodwill arising from the acquisition of shareholdings of at least 5% in a foreign company.

At issue was whether the measure was selective in nature. The European Courts have struggled to arrive at a coherent approach to selectivity in tax cases and have applied different methods for determining selectivity. The General Court had originally applied a 'general availability' test and considered that the measure was not selective because it did not exclude any category of undertakings in the national territory because it was aimed at a category of economic transactions (even if not all national undertakings would benefit from the measure).

However, the Court of Justice of the European Union (CJEU) ruled that the assessment of selectivity in this case must be based on a three-step analysis: first is to determine the 'normal' tax regime as a reference framework. Second, determine whether the measure derogates from the normal tax regime insofar as it differentiates between economic operators that are in a comparable factual and legal situation in light of the objectives pursued by the tax regime. Third, establish if the tax differentiation is justified by the nature and logic of the tax regime.

Following referral back from the CJEU, the General Court applied the threestep test and confirmed the EC's original assessment that the measure should be considered in light of the general provisions of the corporate tax system, specifically the rules on the tax treatment of the financial goodwill. Against this reference system, the General Court concluded that the measure could be selective even if it was available to all companies resident in Spain for tax purposes; the basis for the selectivity is the difference in treatment depending on the company's commercial decision-making (i.e., acquiring a foreign company vs. acquiring a domestic company).

This is a significant development in the application of the three-step test because it confirms that selectivity can be established on the basis of the commercial behavior of undertakings. This approach will give the EC more flexibility in establishing selectivity in future cases — and increases the encroachment of State aid rules into Member States fiscal power.


State aid enforcement does — and will continue — to have a role to play in achieving reform of tax planning by multinational companies. The EC has concluded seven high profile investigations in this area and has found unlawful State aid in six of them, resulting in recovery orders totaling over €14 billion (plus interest) in respect of 40 companies — the most high-profile being the €13 billion (plus interest) recovery order in the Ireland/Apple case. Companies cannot negotiate tax rulings with EU Member State tax authorities as they do with sovereign states elsewhere in the world. They must take into account that the EC has the power and desire to use State aid rules for ex post supervision. The boundaries of this supervision are slowly becoming clear.

The Luxembourg/McDonald's decision is interesting as for the first time it illustrates a limit of State aid enforcement in this area. It is encouraging that the EC chose not to stretch these rules forever to advance policy objectives that may be better achieved through alternative mechanisms, such as legislative change or international cooperation, such as through the work of the OECD.

The EC still has two ongoing investigations in this field. One in respect of possible State aid resulting from tax rulings issued by the Netherlands in favor of Inter IKEA and another concerning a U.K. tax scheme for multinationals.

The judgment of the General Court in the Spanish tax scheme case will strengthen the EC's hand in these cases. In particular, it makes it easier for the EC to define the 'reference' system — the starting point for selectivity assessments — in a way that shows the beneficiaries' position as differentiated.


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).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Similar Articles
Relevancy Powered by MondaqAI
In association with
Related Topics
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions