Joined Cases C‑451/21 P and C‑454/21 P

Grand Duchy of Luxembourg and Others

v

European Commission

Judgment of the Court (Grand Chamber) of 5 December 2023

(Appeal – State aid – Article 107(1) TFEU – Tax rulings adopted by a Member State – Aid declared incompatible with the internal market – Obligation to recover that aid – Concept of ‘advantage’ – Determination of the reference framework – ‘Normal’ taxation under national law – Review by the Court of Justice of the interpretation and application of national law by the General Court of the European Union – Direct taxation – Strict interpretation – Powers of the European Commission – Obligation to state reasons – Legal classification of the facts – Concept of ‘abuse of law’ – Ex ante assessment by the tax authorities of the Member State concerned – Principle of legal certainty)

1. Appeal – Grounds – Incorrect assessment of the facts and evidence – Inadmissibility – Review by the Court of the assessment of the facts and evidence – Possible only where the facts or evidence have been distorted – Commission’s examination of the existence of State aid in tax matters – Definition of the reference framework under national law and interpretation of its constituent provisions – Question of law amenable to judicial review on appeal

   (Art. 256(1), second subpara., TFEU; Statute of the Court of Justice, Art. 58, first para.)

   (see paragraphs 76-80)

2. Aid granted by a Member State – Concept – Selective nature of the measure – Measure conferring a tax advantage – Tax ruling relating to a complex financial and corporate arrangement – Reference framework for determining the existence of a selective advantage – Identifying the ordinary or normal tax regime – Taking into account only of national law in matters of direct taxation – Obligation on the Commission to accept the literal interpretation of national law given by the Member State – Limits – Existence of another interpretation prevailing in the case-law or the administrative practice of that State – Burden of proof on the Commission – Need to adduce reliable and consistent evidence that has been the subject of an exchange of arguments

   (Art. 107(1) TFEU)

   (see paragraphs 106-131)

3. Aid granted by a Member State – Concept – Selective nature of the measure – Measure conferring a tax advantage – Tax ruling relating to a complex financial and corporate arrangement – Non-application by the tax authorities of a national provision intended to prevent abuse of law in tax matters – Grant of a selective advantage – Condition – Non-application of the anti-abuse provision departing from the national case-law or administrative practice

   (Art. 107(1) TFEU)

   (see paragraphs 151-159)

4. Aid granted by a Member State – Concept – Selective nature of the measure – Measure conferring a tax advantage – Tax ruling relating to a complex financial and corporate arrangement – Commission’s analysis concluding that a selective advantage was granted – Analysis vitiated by errors of law

   (Art. 107(1) TFEU)

   (see paragraphs 163-186)

Résumé

Between 2008 and 2014, the Luxembourg tax authorities issued two sets of tax rulings concerning two restructuring operations carried out by several Luxembourg companies in the Engie group.

The restructuring operations in question, which have a similar economic and legal structure, are both centred on the transfer, within the Engie group, of the assets of one company to a subsidiary company. In order to finance that purchase, the subsidiary company issues to an intermediary company a zero-interest bond that is mandatorily convertible into shares at maturity, known as a zéro-intérêts obligation remboursable en actions (zero-interest bond repayable in shares (ZORA)). When the bond matures, the subsidiary company must repay, by issuing shares, the nominal amount of the bond plus a ‘premium’ consisting of all the profit made by the subsidiary company during the term of the bond, referred to as ‘ZORA accretions’.

In order to finance the bond that it has acquired, the intermediary company, for its part, uses a prepaid forward sale contract entered into with a holding company in the Engie group, which is the sole shareholder of both the subsidiary company and the intermediary company. On entering into that contract, the holding company pays to the intermediary company an amount corresponding to the nominal amount of the ZORA, in consideration for which the intermediary company transfers to the holding company the rights to the shares that will be issued at the end of the ZORA, including those corresponding, where applicable, to the cumulative value of the ZORA accretions.

After requesting information from the Luxembourg authorities concerning the tax rulings adopted with regard to the Engie group, the European Commission initiated the formal investigation procedure. At the end of that procedure, the Commission found, by decision of 20 June 2018, ( 1 ) that the Grand Duchy of Luxembourg had granted, through its tax authorities, in breach of Article 107(1) and Article 108(3) TFEU, a selective advantage to the Engie group. It ordered the recovery of that advantage from the beneficiaries. In its decision, the Commission found, in essence, that, as a result of the tax rulings at issue, almost all of the profit made by the Engie subsidiaries in Luxembourg had not been taxed.

The Grand Duchy of Luxembourg and the Engie group companies brought actions for annulment of that decision, which were dismissed by the General Court. ( 2 )

Following appeals brought by the Grand Duchy of Luxembourg and the Engie group companies, the Court of Justice, sitting as the Grand Chamber, sets aside the judgment of the General Court and then, giving final judgment in the dispute, also annuls the decision at issue. In that context, it clarifies its case-law concerning the definition and the analysis of the reference framework in the light of which the selectivity of tax measures must be assessed in order to determine whether they constitute State aid for the purposes of Article 107(1) TFEU.

Findings of the Court

First of all, the Court declares admissible the grounds of the appeals challenging the General Court’s findings with regard to the reference framework under Luxembourg law that the Commission determined for the purpose of examining whether the tax rulings at issue granted a selective advantage to the Engie group.

In that regard, the Court notes that the question whether the General Court adequately defined the reference system under Luxembourg law and, by extension, correctly interpreted the national provisions making up that system is a question of law which can be reviewed by the Court on appeal. Thus, the appellants’ arguments aimed at calling into question the choice of reference framework or its meaning in the first step of the analysis of the existence of a selective advantage are admissible, since that analysis derives from a legal classification of national law on the basis of a provision of EU law.

After declaring those grounds admissible, the Court recalls, as to the substance, that, in order to classify a national tax measure as ‘selective’ for the purpose of applying Article 107(1) TFEU, the Commission must begin by identifying the reference system, that is the ‘normal’ tax system applicable in the Member State concerned, and demonstrate, as a second step, that the tax measure at issue is a derogation from that reference system, in so far as it differentiates between operators who, in the light of the objective pursued by that system, are in a comparable factual and legal situation.

On that point, the Court also observes that, outside the spheres in which EU tax law has been harmonised, it is the Member State concerned which determines, by exercising its own competence in the matter of direct taxation, the characteristics constituting the tax, which define, in principle, the reference system or the ‘normal’ tax regime. This includes, in particular, the determination of the basis of assessment, the taxable event and any exemptions to which the tax is subject. It follows that only the national law applicable in the Member State concerned must be taken into account in order to identify that reference system. That conclusion is, however, without prejudice to the possibility of finding that the reference framework itself, as it results from national law, is incompatible with EU law on State aid, since the tax system at issue has been configured according to manifestly discriminatory parameters intended to circumvent that law.

In the light of those principles, the Court finds that, in order to prove the selectivity of the tax rulings at issue, the Commission relied on four lines of reasoning, the second of which was endorsed by the General Court in the judgment under appeal. In connection with that second line of reasoning, the Commission argued that the exemption of income corresponding to the ZORA accretions, granted under the tax rulings at the level of the holding companies, derogated from the ‘normal’ application of Articles 164 and 166 of the Luxembourg Law on income tax (‘the LIR’), ( 3 ) relating respectively to the taxation of profit distributions and the exemption of income from participations.

The Grand Duchy of Luxembourg having challenged the Commission’s interpretation of Articles 164 and 166 of the LIR, the Court notes that, where the interpretation of the ‘normal’ tax regime given by the Member State concerned is compatible with the wording of the provisions in question, the Commission may depart from that interpretation only if it is able to establish, on the basis of reliable and consistent evidence that has been the subject of an exchange of arguments, that another interpretation prevails in the case-law or the administrative practice of that Member State.

However, the elements on which the General Court relied did not permit it validly to find that the Commission had been able to establish to the requisite legal standard that, with regard to the interpretation of Articles 164 and 166 of the LIR, an interpretation prevailed in Luxembourg law other than that put forward by the Grand Duchy of Luxembourg, that interpretation being compatible with the wording of those provisions. Thus, the Court finds that it was following an analysis vitiated by an error of law and a distortion of the facts that the General Court upheld as well founded the second line of reasoning put forward by the Commission for the purpose of establishing the selectivity of the tax rulings.

The Court also examines the appellants’ arguments relating to the fourth line of reasoning put forward in the alternative by the Commission for the purpose of establishing the selectivity of the tax rulings at issue, according to which the selective advantage resulted from the non-application by the Luxembourg tax authorities of Article 6 of the Law on tax adjustment, ( 4 ) on abuse of law. On that point, the appellants challenge the General Court’s analysis that the Commission could establish the selective nature of the tax rulings in the light of that article without taking into account the national administrative practice relating to that provision, on the ground that that provision did not give rise to any difficulties of interpretation.

In that regard, the Court recalls that classifying a tax measure as ‘selective’ presupposes not only familiarity with the content of the provisions of relevant law but also requires examination of their scope on the basis, inter alia, of the administrative and judicial practice of the Member State concerned. It also emphasises that Article 6 of the Law on tax adjustment, on abuse of law, is inherently particularly general in nature. The choice to lay down such a provision and to define the manner in which it is to be implemented falls within the Member States’ own competence in the matter of direct taxation in areas that have not been harmonised under EU law and, therefore, within their fiscal autonomy.

In those circumstances, the Commission could not conclude that the non-application of Article 6 of the Law on tax adjustment by the Luxembourg tax authorities in order to refuse the tax treatment sought by a taxpayer in a tax ruling request led to the grant of a selective advantage unless that non-application departs from the national case-law or administrative practice relating to that provision. If that were not the case, the Commission would itself be able to define what does or does not constitute a correct application of such a provision, which would exceed the limits of the powers conferred on it by the Treaties in the field of State aid review.

Accordingly, the Court concludes that the General Court also erred in law in finding that the Commission was not required to take into account the administrative practice of the Luxembourg tax authorities relating to Article 6 of the Law on tax adjustment, on the ground that that provision did not give rise to any difficulties of interpretation.

In the light of the foregoing, the Court sets aside the judgment under appeal. Taking the view, moreover, that the state of the proceedings permits final judgment to be given in the matter, the Court then itself examines the actions for annulment of the decision at issue brought by the Grand Duchy of Luxembourg and the Engie group companies.

In support of their actions for annulment, those parties dispute, in essence, the four lines of reasoning on which the Commission relied in order to establish the selectivity of the tax rulings at issue.

As regards the second line of reasoning put forward by the Commission, according to which the exemption of income corresponding to the ZORA accretions, granted under the tax rulings at the level of the holding companies, derogated from the ‘normal’ application of Articles 164 and 166 of the LIR, the Court points out, first, that it follows from its analysis of the grounds of the appeals that the General Court’s assessment is vitiated by a distortion of the facts. Second, the Court confirms that, in the contested decision, the Commission departed from the interpretation of Articles 164 and 166 of the LIR given by the Grand Duchy of Luxembourg without establishing that that interpretation was incompatible with the wording of those provisions or that another interpretation prevailed in the case-law or administrative practice of Luxembourg, which constitutes an error of law.

After finding that it follows from its analysis of the grounds of the appeals that the fourth line of reasoning was also legally flawed, the Court examines the grounds for annulment relating to the first and third lines of reasoning, in which the Commission relied on a reference framework encompassing the Luxembourg corporate income tax system for the purpose of establishing the selectivity of the tax rulings.

In that regard, the Court observes, in particular, that the reference system or the ‘normal’ tax regime must include the provisions laying down the exemptions which the national tax authorities considered to be applicable to the present case, where, as in the present case, those provisions do not, in themselves, confer a selective advantage for the purposes of Article 107(1) TFEU. In such a situation, in the light of the Member States’ own competence in the matter of direct taxation and the regard to be had for their fiscal autonomy, the Commission cannot establish a derogation from a reference framework merely by finding that a measure departs from a general objective of taxing all companies resident in the Member State concerned, without taking account of provisions of national law specifying the manner in which that objective is to be implemented. In the present case, the Commission did not include Article 166 of the LIR in the reference framework encompassing the Luxembourg corporate income tax system, even though that provision constitutes the legal basis for the tax rulings at issue. Thus, the Court concludes that that error necessarily vitiated the whole of the selectivity analysis carried out by the Commission on the basis of the reference framework encompassing the Luxembourg corporate income tax system.

In the light of the foregoing, the Court upholds the pleas for annulment of the decision at issue alleging errors of assessment and of law in the identification of a selective advantage and, consequently, annuls that decision.

( 1 ) Commission Decision (EU) 2019/421 of 20 June 2018 on State aid SA.44888 (2016/C) (ex 2016/NN) implemented by Luxembourg in favour of Engie (OJ 2019 L 78, p. 1; ‘the decision at issue’).

( 2 ) Judgment of 12 May 2021, Luxembourg and Others v Commission (T‑516/18 and T‑525/18, EU:T:2021:251).

( 3 ) Loi du 4 décembre 1967, concernant l’impôt sur le revenu (Law of 4 December 1967 on income tax) (Mémorial A 1967, p. 1228), as amended.

( 4 ) Steueranpassungsgesetz (Law on tax adjustment) of 16 October 1934 (Mémorial A 1934, p. 9001).