Case C‑457/21 P

European Commission

v

Grand Duchy of Luxembourg,
Amazon.com, Inc
and
Amazon EU Sàrl

Judgment of the Court (Second Chamber) of 14 December 2023

(Appeal – State aid – Article 107(1) TFEU – Tax ruling adopted by a Member State – Aid declared incompatible with the internal market – Concept of ‘advantage’ – Determination of the reference framework – ‘Normal’ taxation according to national law – Arm’s length principle – Review by the Court of Justice of the interpretation and application of national law by the General Court)

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 – Examination by the Commission of whether there is State aid in the matter of taxation – Definition of the reference framework in national law and interpretation and application 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 17-23)

2. Aids granted by Member States – Concept – Selective nature of the measure – Measure conferring a tax advantage – Tax ruling on the transfer pricing of an integrated undertaking – Reference framework for determining whether there is a selective advantage – Identifying the ordinary or normal tax regime – Account taken only of national law in the matter of direct taxation – Examination of the tax treatment of intragroup transactions having regard to the arm’s length principle irrespective of the incorporation of that principle into national law – Incorrect determination of the reference framework

   (Art. 107(1) TFEU)

   (see paragraphs 33-50)

3. Aid granted by a Member State – Concept – Selective nature of the measure – Measure conferring a tax advantage – Tax ruling on the transfer pricing of an integrated undertaking – Commission’s analysis concluding that a selective advantage was granted – Analysis vitiated by errors of law in the determination of the reference framework for the examination of whether there was a selective advantage

   (Art. 107(1) TFEU)

   (see paragraphs 53-58)

Résumé

From 2006, the Amazon group pursued its commercial activities in Europe through two companies established in Luxembourg, namely Amazon Europe Holding Technologies SCS (‘LuxSCS’) and Amazon EU Sàrl (‘LuxOpCo’), a wholly owned subsidiary of LuxSCS.

In that context, LuxSCS obtained, by various agreements concluded with American entities of the Amazon group, the right to use certain intellectual property rights concerning, essentially, technology, client data and the marks of that group, as well as the right to sub-license the intangible assets covered. On that basis, LuxSCS concluded, inter alia, a licence agreement with LuxOpCo, as the principle operator of the Amazon group’s business in Europe. Under that agreement, LuxOpCo undertook to pay a royalty to LuxSCS in return for the use of the intangible assets.

In 2014, the Amazon group underwent a new restructuring and the contractual arrangement between LuxSCS and LuxOpCo was no longer applicable.

In preparation for the 2006 restructuring, the Luxembourg tax authorities granted the Amazon group, following the request by the latter, a tax ruling confirming the treatment of LuxOpCo and LuxSCS for the purposes of Luxembourg corporate income tax. That tax ruling, first, confirmed that LuxSCS was not subject to Luxembourg corporate income tax because of its legal form and, secondly, endorsed the method of calculating the annual royalty to be paid by LuxOpCo to LuxSCS under the abovementioned licence agreement.

By decision of 4 October 2017 ( 1 ) (‘the decision at issue’), the European Commission found that that tax ruling, as well as its annual implementation from 2006 to 2014, constituted an aid to the Amazon group that was incompatible with the internal market within the meaning of Article 107 TFEU. In that regard, the Commission found that the method of calculating the annual royalty to be paid by LuxOpCo to LuxSCS, as confirmed in the tax ruling, did not allow an arm’s length outcome to be reached. According to the Commission, the annual royalty calculated using that method was too high, which artificially reduced the tax base of LuxOpCo.

Seised of two actions for annulment brought by the Grand Duchy of Luxembourg and the Amazon group against the decision at issue, the General Court annulled that decision by a judgment of 12 May 2021, ( 2 ) on the ground, in essence, that the Commission had not succeeded in demonstrating the existence of an advantage within the meaning of Article 107(1) TFEU.

The appeal brought by the Commission is dismissed by the Court of Justice, which holds, by a substitution of grounds and in an extension of its judgment in Fiat Chrysler Finance Europe v Commission, ( 3 ) that by applying, in the decision at issue, the arm’s length principle, even though that principle was not incorporated into Luxembourg tax law at the time the tax ruling was made, the Commission committed an error in the identification of the reference framework with regard to which that tax ruling had to be assessed, which vitiated all of its reasoning as to the existence of a selective advantage.

Findings of the Court

As a first step, the Court declares admissible the grounds of the appeal challenging the interpretation and application of the arm’s length principle made by the General Court in support of its conclusion that the Commission had not succeeded in demonstrating the existence of an advantage within the meaning of Article 107(1) TFEU.

The Commission having included the arm’s length principle in the reference framework used for the purposes of its examination of whether there was a selective advantage, the Court finds that the question whether, in the judgment under appeal, the General Court adequately defined the relevant reference system and, by extension, correctly interpreted and applied its constituent provisions, is a question of law which can be reviewed by the Court of Justice on appeal.

It follows that the Commission’s arguments seeking to put at issue the interpretation and application of the arm’s length principle made by the General Court in order to rule that the reference system used in the decision at issue was incorrect and, therefore, that the existence of an advantage for the benefit of the Amazon group was not established.

On the substance, the Court recalls, as a second step, that, as EU law currently stands, the arm’s length principle cannot be applied for the purposes of examining tax measures in the context of Article 107(1) TFEU unless it is recognised by the national law concerned and in accordance with the rules defined by the latter. Therefore, the General Court erred in law in finding that the Commission could, in a general manner, apply the arm’s length principle in the context of implementing Article 107(1) TFEU, without stating that that institution was required, as a preliminary step, to satisfy itself that that principle was incorporated into Luxembourg tax law and that express reference was made to it as such in that law.

Furthermore, by referring to the Organisation for Economic Cooperation and Development (OECD) Guidelines as having a ‘certain practical significance’ in the assessment of whether the arm’s length principle has been observed despite those guidelines not being binding on the member States of the OECD, the General Court committed another error of law in that it took for granted that those guidelines applied, without reviewing whether the Commission had satisfied itself that Luxembourg tax law had made express reference to them.

Accordingly, the Court concludes that the analysis by the General Court as regards the condition that there is a selective advantage, for the purposes of Article 107(1) TFEU, is vitiated in law since it rests on an incorrect determination of the relevant reference system.

As a third step, the Court decides, nevertheless, to dismiss the appeal in its entirety, by a substitution of grounds.

In that regard the Court finds, first, that, in order to establish the existence of an advantage for the benefit of the Amazon group, the Commission applied the arm’s length principle as if it had been recognised as such in EU law, even though it is clear from the judgment in Fiat that as EU law currently stands, there is no autonomous arm’s length principle that applies irrespective of the incorporation of that principle into the national law.

Secondly, the Commission considered that the Luxembourg law on income tax was interpreted by the tax administration as enshrining the arm’s length principle in Luxembourg tax law. However, as is clear from the judgment in Fiat, only the incorporation of that principle as such into national law, which as a minimum requires that that law refer explicitly to that principle, would permit the Commission to apply it in the determination of the existence of a selective advantage within the meaning of Article 107(1) TFEU. As the Commission itself recognised in the decision at issue, that requirement was not satisfied at the time the tax ruling at issue was made, such that that institution could not apply that principle retroactively in that decision.

Thirdly, the Court finds that, by applying, in the decision at issue, the OECD Guidelines on transfer pricing without having demonstrated that they had been, wholly or in part, explicitly adopted in Luxembourg law, the Commission breached the prohibition, recalled in the judgment in Fiat, on taking into account, in the examination of the existence of a selective tax advantage within the meaning of Article 107(1) TFEU and for the purposes of establishing the tax burden that should normally be borne by an undertaking, parameters and rules external to the national tax system at issue, such as those guidelines, unless that national tax system makes explicit reference to them.

Having regard to the foregoing, the Court concludes that General Court was fully entitled to find that the Commission had not established the existence of an advantage for the benefit of the Amazon group, within the meaning of Article 107(1) TFEU, and to annul, therefore, the decision at issue. Accordingly, it dismisses the appeal brought by the Commission in its entirety.

( 1 ) Commission Decision (EU) 2018/859 of 4 October 2017 on State aid SA.38944 (2014/C) (ex 2014/NN) implemented by Luxembourg to Amazon (OJ 2018 L 153, p. 1).

( 2 ) Judgment of 12 May 2021, Luxembourg and Amazon v Commission (T‑816/17 and T‑318/18, EU:T:2021:252).

( 3 ) Judgment of 8 November 2022, Fiat Chrysler Finance Europe v Commission (C‑885/19 P and C‑898/19 P, EU:C:2022:859; ‘the judgment in Fiat’).