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Document L:2018:153:FULL

Official Journal of the European Union, L 153, 15 June 2018


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ISSN 1977-0677

Official Journal

of the European Union

L 153

European flag  

English edition

Legislation

Volume 61
15 June 2018


Contents

 

II   Non-legislative acts

page

 

 

DECISIONS

 

*

Commission Decision (EU) 2018/859 of 4 October 2017 on State aid SA.38944 (2014/C) (ex 2014/NN) implemented by Luxembourg to Amazon (notified under document C(2017) 6740)  ( 1)

1

 

*

Commission Decision (EU) 2018/860 of 7 February 2018 on the Aid Scheme SA.45852 — 2017/C (ex 2017/N) which Germany is planning to implement for Capacity Reserve (notified under document C(2018) 612)  ( 1)

143

 

 

GUIDELINES

 

*

Guideline (EU) 2018/861 of the European Central Bank of 24 April 2018 amending Guideline ECB/2013/23 on government finance statistics (ECB/2018/13)

161

 

 

ACTS ADOPTED BY BODIES CREATED BY INTERNATIONAL AGREEMENTS

 

*

Regulation No 55 of the Economic Commission for Europe of the United Nations (UNECE) — Uniform provisions concerning the approval of mechanical coupling components of combinations of vehicles [2018/862]

179

 


 

(1)   Text with EEA relevance.

EN

Acts whose titles are printed in light type are those relating to day-to-day management of agricultural matters, and are generally valid for a limited period.

The titles of all other Acts are printed in bold type and preceded by an asterisk.


II Non-legislative acts

DECISIONS

15.6.2018   

EN

Official Journal of the European Union

L 153/1


COMMISSION DECISION (EU) 2018/859

of 4 October 2017

on State aid SA.38944 (2014/C) (ex 2014/NN) implemented by Luxembourg to Amazon

(notified under document C(2017) 6740)

(Only the French text is authentic)

(Text with EEA relevance)

THE EUROPEAN COMMISSION,

Having regard to the Treaty on the Functioning of the European Union, and in particular the first subparagraph of Article 108(2) thereof,

Having regard to the Agreement on the European Economic Area, and in particular Article 62(1)(a) thereof,

Having called on interested parties to submit their comments pursuant to the provisions cited above (1) and having regard to their comments,

Whereas:

1.   PROCEDURE

(1)

By letter of 24 June 2014, the Commission sent a request for information to Luxembourg regarding its tax ruling practice in relation to Amazon. In that letter, the Commission requested Luxembourg to confirm that Amazon is liable to taxation in Luxembourg and to specify the extent of the activities of the Amazon group benefiting from a tax reduction under the taxation regime for intellectual property. In addition, the Commission requested all tax rulings addressed to the Amazon group that were still in force. By email of 18 July 2014, Luxembourg requested an extension of the deadline to respond to the Commission's letter of 24 June 2014, which it was granted (2).

(2)

On 4 August 2014, Luxembourg transmitted its reply to the Commission's request of 24 June 2014, to which it annexed, inter alia, a letter dated 6 November 2003 addressed to Amazon.com, Inc. (‘the contested tax ruling’) from the Administration des contributions directes (‘the Luxembourg tax administration’), a letter dated 23 October 2003 from Amazon.com, Inc. and a letter dated 31 October 2003 prepared by [Advisor 1] (*1) on behalf of Amazon.com, Inc. to the Luxembourg tax administration in which a request for a ruling was made (collectively referred to as ‘the ruling request’), and the annual financial reports of Amazon EU Société à responsabilité limitée (‘LuxOpCo’) (3), Amazon Europe Holding Technologies SCS (‘LuxSCS’) (4), Amazon Services Europe Société à responsabilité limitée (‘ASE’), Amazon Media EU Société à responsabilité limitée (‘AMEU’) and other Amazon Luxembourg group entities.

(3)

On 7 October 2014, the Commission adopted a decision to open the formal investigation procedure in accordance with Article 108(2) of the Treaty in respect of the contested tax ruling on the ground that it harboured serious doubts as to the compatibility of that measure with the internal market (‘the Opening Decision’) (5). In that decision, Luxembourg was requested to provide additional information on the contested tax ruling (6). By letters of 3 and 5 November 2014, Luxembourg requested an extension of the deadline to reply to the Opening Decision.

(4)

By letter of 21 November 2014, Luxembourg submitted its comments to the Opening Decision. That submission included, inter alia, a transfer pricing report prepared by [Advisor 2] on behalf of Amazon (‘the TP Report’), which had not been previously submitted to the Commission.

(5)

On 6 February 2015, the Opening Decision was published in the Official Journal of the European Union (7). Interested parties were invited to submit their comments on that decision.

(6)

By letter of 13 February 2015, the Commission sent an additional request for information to Luxembourg. In that letter, the Commission also asked Luxembourg to agree that it could contact Amazon directly to obtain the requested information if that information was not in Luxembourg's possession. On 24 February 2015, Luxembourg requested an extension of deadline to reply to the Commission's request for information.

(7)

By letter of 5 March 2015, Amazon submitted its observations on the Opening Decision. Comments on the Opening Decision were also submitted by the following third parties: Oxfam on 14 January 2015, the Bundesarbeitskammer on 4 February 2015, Fedil on 27 February 2015, the Booksellers Association (‘BA’) on 3 March 2015, le Syndicat de la librairie française (‘SLF’) on 4 March 2015, the European and International Booksellers Federation (‘EIBF’) on 4 March 2015, ATOZ S.A. on 5 March 2015, the Computer and Communications Industry Association (‘CCIA’) on 5 March 2015 and the European Policy Information Center (‘EPICENTER’) on 5 March 2015. In addition, the Federation of European Publishers (‘FEP’) on 5 March 2015 and le Syndicat des Distributeurs de Loisirs Culturels (‘SDLC’) on 5 March 2015 expressed their support of the EIBF's position.

(8)

On 12 March 2015, a telephone conference took place between the Commission and Luxembourg in which the latter assured the former that it would be able to provide a complete reply to the Commission's request for information of 13 February 2015 by 17 March 2015.

(9)

By letter of 17 March 2015, Luxembourg partially replied to the Commission's request for information of 13 February 2015. It further explained that outstanding information, in particular that concerning certain contractual relationships between Amazon entities in Luxembourg and third parties, was not in its possession.

(10)

On 19 March 2015, the Commission transmitted the comments of third parties on the Opening Decision to Luxembourg.

(11)

By email of 19 March 2015, Amazon submitted the amended and restated cost sharing agreement (‘CSA’) as entered into between LuxSCS and two Amazon group entities in the United States on 1 January 2005, as again amended and restated on 2 July 2009 (effective from 5 January 2009) and amended with effect of 1 January 2014 (8).

(12)

By email exchanges of 18, 19 and 20 March 2015, the Commission indicated to Luxembourg that its reply of 17 March 2015 to the Commission's request for information of 13 February 2015 was incomplete and it posed further questions for clarification.

(13)

On 20 March 2015, Luxembourg agreed that the Commission could address its questions directly to Amazon. On 26 March 2015, the Commission informed Luxembourg that, in accordance with Article 6(a) of Council Regulation (EC) No 659/1999 of 22 March 1999 (9), it had identified the formal investigation procedure on the contested tax ruling as ineffective to date. On that basis, and with the authorisation of Luxembourg (10), the Commission, in accordance with Article 6(a)(6) of Regulation (EC) No 659/1999, sent a request to Amazon on 26 March 2015 (the ‘MIT request’) to provide it with all agreements concluded by Amazon since 2000 pursuant to which Amazon's intellectual property (‘IP’) rights were licensed or otherwise made available (‘the IP agreements’), as well as any cost sharing and/or buy-in agreements concluded between LuxSCS and other Amazon group entities. Amazon was also requested to provide information on the activities of LuxSCS, the financial accounts of Amazon subsidiaries based outside Luxembourg, and to explain or reconcile certain financial data. Finally, information on the recent changes in the legal structure of the Amazon group in Luxembourg was requested.

(14)

By letter of 20 April 2015, Luxembourg requested the Commission to explain the purpose of a meeting the latter had held with Oxfam and Eurodad, of which Luxembourg had not been informed. It also submitted a request not to publish the decision to send the MIT request.

(15)

On 4 May 2015, Amazon partially replied to the Commission's request for information of 26 March 2015. Amazon also confirmed that its structure in Luxembourg had changed in 2014 and that a new ruling was granted by Luxembourg on that basis, but explained that the change was irrelevant for the purposes of the Commission's investigation.

(16)

On 8 May 2015, a meeting was held between the Commission, Luxembourg and Amazon. By letter of 12 June 2015, Amazon submitted further comments following that meeting. Amazon also submitted a list of IP agreements, referred to by Amazon as the ‘M.com Agreements’, pursuant to which Amazon made IP related to its platform technology available to unrelated third parties.

(17)

By letter of 13 May 2015, Luxembourg submitted its observations on the third party comments on the Opening Decision.

(18)

By letter of 3 July 2015, the Commission reminded Amazon to provide certain outstanding information, in particular on the IP agreements, and asked for additional information.

(19)

By letter of 10 July 2015 (again submitted on 23 July 2015), Luxembourg submitted a statement concerning the non-retroactive application of a final negative decision of the Commission.

(20)

By letters of 24 and 31 July 2015, Amazon provided a partial reply to the Commission's request of 3 July 2015, including information on the M.com Agreements. On the basis of those replies, Amazon considered the information request concerning the IP agreements to have been fully replied to, since according to Amazon no other IP agreements concluded by Amazon were comparable to the Intellectual Property License Agreement concluded between LuxSCS and LuxOpCo as of 30 April 2006 (the ‘License Agreement’) (11). Amazon also requested an extension of the deadline to submit the other information requested by the Commission.

(21)

By letter of 31 July 2015, the Commission reminded Amazon to provide all requested information, in particular complete information on all IP agreements concluded by Amazon since 2000. It also requested Amazon to provide the new ruling granted to it by Luxembourg in 2014, to which a reference was made in Luxembourg's letter of 4 August 2014 and Amazon's letter of 4 May 2015.

(22)

By letter of 21 August 2015, Amazon replied to the Commission's request, except for the submission of information on the remaining IP agreements.

(23)

On 8 September 2015, a meeting took place between the Commission and Amazon of which Luxembourg was informed. Following that meeting, the Commission reminded Amazon by email of 8 September 2015 about the outstanding request for information concerning the IP agreements.

(24)

By email of 14 September 2015, Amazon explained that no other agreements exist pursuant to which the same intellectual property as that covered the License Agreement was or will be made available to related or unrelated parties. At the same time, Amazon informed the Commission that it was preparing a list of intra-group IP agreements, regardless of whether they relate to the EU or intellectual property covered by the License Agreement between LuxSCS and LuxOpCo. That list was submitted to the Commission on 17 September 2015.

(25)

By email of 23 September 2015, Amazon submitted a list of agreements by means of which intellectual property was licensed in from or licensed out to third parties.

(26)

By email of 29 September 2015, the Commission reminded Amazon to submit the IP agreements as requested by the Commission on 26 March and 3 July 2015 on the basis of the lists provided by Amazon on 17 and 23 September 2015. In addition, the Commission requested further information from Amazon concerning the cost sharing reports and LuxOpCo's customers per website.

(27)

By e-mails of 30 September and 1, 2, 12, 13, 20 and 27 October 2015, Amazon submitted information.

(28)

On 28 October 2015, a meeting took place between the Commission, Luxembourg and Amazon.

(29)

By email of 20 November 2015, the Commission reminded Amazon about the scope of its request for information of 26 March 2015 regarding Amazon's internal and external IP agreements and requested Amazon to submit additional information.

(30)

During a meeting on 27 November 2015, a company which requested its name not to be revealed (‘Company X’) provided the Commission with market information in relation to the Commission's investigation. In a conference call on 15 January 2016, Company X provided additional information on the e-commerce business in Europe. By email of 25 January 2016 regarding the minutes of the conference call, Company X provided additional information.

(31)

On 30 November 2016, Amazon submitted additional information.

(32)

By email of 1 December 2015, Amazon requested an extension to reply to the Commission's request for information dated 20 November 2015.

(33)

On 4 December 2015, Amazon submitted the information requested by the Commission in its email of 20 November 2015 and asked for an extension of deadline for the remaining responses.

(34)

By letters of 10 and 28 December 2015, Luxembourg submitted its observations following the meeting of 28 October 2015.

(35)

By email of 11 December 2015, the Commission reminded Amazon about the outstanding replies from its information request of 20 November 2015 and sent a further request for information with additional questions to Amazon.

(36)

On 18 December 2015, Amazon provided further responses to the Commission's request for information of 20 November 2015.

(37)

By email of 18 December 2015, the Commission invited Luxembourg to submit its observations and comments on the information submitted by Amazon to the Commission by that point of the investigation.

(38)

On 12 and 15 January 2016, Amazon submitted partial responses to the Commission's information request of 11 December 2015 and asked for an extension of deadline for the outstanding information.

(39)

On 18 January 2016, Amazon submitted further information.

(40)

By email of 19 January 2016, the Commission informed Amazon that certain replies to questions of previous requests for information were still outstanding. In addition, the Commission requested clarification and further information.

(41)

On 22 January 2016, Amazon partially replied to the Commission's request for information of 19 December 2015. On 28 January 2016, Amazon submitted a partial reply to the Commission's request for information of 11 December 2015. By letters of 5, 15, 19 and 24 February 2016, Amazon submitted partial replies to the Commission's request for information of 19 January 2016.

(42)

On 26 February 2016, the Commission sent a reminder to Amazon requesting it to reply to outstanding questions concerning the requests for information of 20 November 2015, 11 and 18 December 2015 and 19 January 2016.

(43)

On 4 and 21 March 2016, Amazon submitted partial replies to the Commission's request for information of 11 December 2015.

(44)

By email of 11 March 2016, Amazon submitted a partial reply to the Commission's request for information of 26 February 2016.

(45)

By email of 22 March 2016, Amazon submitted a partial reply to the Commission's requests for information of 19 January 2016 and 26 February 2016.

(46)

By email of 8 March 2016, Amazon agreed to waive confidentiality claims previously made vis-à-vis Luxembourg in a letter of 22 January 2016 for certain information submitted and committed to share this information with Luxembourg.

(47)

On 14 March 2016, Amazon confirmed to have shared its latest submission to the Commission with Luxembourg.

(48)

On 1 April 2016, the Commission requested Company X to agree that certain market information provided by it would be shared with Luxembourg. On 5 April 2016, Company X provided its agreement.

(49)

On 8 April 2016, the Commission inquired with Amazon about the information that Amazon had shared with Luxembourg by that point of the investigation. The Commission also informed Amazon that certain information of the Commission's request for information of 11 February 2015 was still outstanding. In addition, the Commission addressed a request for further clarification and information to Amazon.

(50)

By email of 11 April 2016, Amazon confirmed what information it had shared with Luxembourg.

(51)

By letter of 18 April 2016, the Commission inquired with Luxembourg what information had been shared with it by Amazon and invited Luxembourg to submit its comments on those submissions. The Commission further recalled its email of 18 December 2015, by which it had invited Luxembourg to comment on Amazon's submissions. Finally, the Commission shared the market information as agreed with Company X with Luxembourg and asked Luxembourg for its comments.

(52)

On 22 April 2016, Amazon submitted a partial reply to the Commission's request for information of 8 April 2016 and requested an extension of the deadline for the remaining replies.

(53)

By letter of 2 May 2016 (again submitted on 10 May 2016), Luxembourg confirmed receipt of the information submitted by Amazon by that point of the investigation and submitted its observations on Amazon's submissions. As regards the market information of Company X, Luxembourg informed the Commission that it had shared that information with Amazon, since Amazon would be in a better position to comment.

(54)

By email of 2 May 2016, Amazon submitted a partial reply and acknowledged the outstanding replies to questions raised in the Commission's request for information dated 8 April 2016, as mentioned in the letter of 22 April 2016.

(55)

By email of 17 May 2016, the Commission clarified the scope of the information it previously requested from Amazon and recalled that certain information was still outstanding from its requests for information of 11 December 2015 and 8 April 2016.

(56)

By email of 24 May 2016, Amazon submitted its reply to the Commission's email of 17 May 2016.

(57)

On 26 May 2016, a meeting between the Commission, Luxembourg and Amazon took place. During that meeting and in the draft minutes thereof, the Commission raised further questions to Amazon. By letter of 20 June 2016, Amazon replied to those questions.

(58)

By letter of 21 June 2016, Amazon submitted its comments to the market information of Company X. It also requested access to the complete submission of Company X and the disclosure of its identity.

(59)

On 7 July 2016, the Commission provided its comments to the amended minutes of the meeting of 26 May 2016 to Amazon. In addition, the Commission requested further information from Amazon.

(60)

By email of 22 July 2016, Amazon submitted a partial reply to the Commission's request for information of 7 July 2016. In its reply, Amazon informed the Commission about the protective order covering documents used in US Tax Court proceedings. Therefore, Amazon suggested submitting redacted documents, since these were available to Amazon.

(61)

By email of 27 July 2016, the Commission reminded Amazon about outstanding information following its request for information of 7 July 2016 and accepted to receive temporarily documents from the US Tax Court proceedings in a redacted version. In addition, the Commission requested further clarification and information from Amazon.

(62)

By email of 29 July 2016, Amazon submitted a partial reply to the Commission's request for information of 7 July 2016 and requested an extension of the deadline to reply to the remaining questions. By letter of 12 August 2016, Amazon submitted a partial reply to the Commission's request for information of 7 July 2016 and 27 July 2016.

(63)

By email of 19 August 2016, the Commission requested further clarification and information from Amazon concerning Amazon's replies to the request for information of 7 July 2016.

(64)

By email of 19 August 2016, and again by letter of 22 August 2016, the Commission sent a request for information to Amazon asking for the entire redacted documents of the US Tax Court proceedings.

(65)

On 26 August 2016, Amazon submitted a partial reply to the Commission's request for information of 7 July 2016 and requested an extension of the deadline to complete its reply.

(66)

By email of 30 August 2016, Amazon informed the Commission about its successful application concerning access to the documents used in the US Tax Court proceedings and announced the upcoming submission of unredacted documents.

(67)

On 9 September 2016, Amazon submitted a partial reply to the Commission's request for information dated 19 August 2016.

(68)

On 30 September 2016, Amazon submitted the unredacted documents as produced in the US Tax Court proceedings, as requested by the Commission on 22 August 2016.

(69)

By e-mails of 7 and 19 December 2016, the Commission asked Amazon for additional information concerning the US Tax Court proceedings. On 20 December 2016, Amazon submitted its reply.

(70)

On 21 December 2016, the Commission sent a request for information to Amazon to which Amazon submitted a partial reply on 20 January 2017. By email of 2 February 2017, the Commission sent Amazon further clarifications concerning its request for information of 21 December 2017. On 6, 8 and 27 February and 6 March 2017, Amazon submitted further information and partial replies to the Commission. By email of 13 March 2017, the Commission reminded Amazon to submit outstanding information.

(71)

On 14 March 2017, the Commission sent a request for information to Amazon.

(72)

By email of 24 March 2017, Amazon submitted the opinion of the US Tax Court of 23 March 2017 to the Commission.

(73)

By email of 27 March 2017, the Commission requested further information from Amazon concerning the US Tax Court's opinion.

(74)

On 28 March 2017, Amazon replied to the Commission requesting more time to answer due to the ongoing post-trial procedures in the US.

(75)

By email of 4 April 2017, Amazon submitted a partial reply to the Commission's request for information of 14 March 2017.

(76)

By email of 7 April 2017, the Commission informed Luxembourg and Amazon that it was obliged to decline Amazon's request to grant full access to the submissions of Company X.

(77)

On 11 April 2017, Amazon submitted another partial reply to the Commission's request for information of 14 March 2017 and requested an extension of the deadline for some remaining parts of its reply.

(78)

By email of 12 April 2017, Amazon submitted a partial reply to the Commission.

(79)

On 17 April 2017, Amazon submitted further information concerning the post-trial procedure in the US.

(80)

On 18 May 2017, Amazon sent another partial reply and thus completed its reply to the Commission's request for information of 14 March 2017.

(81)

By email of 19 May 2017, the Commission sent a request for information to Amazon.

(82)

On 29 May 2017, Amazon submitted further information to the Commission.

(83)

By email of 7 June 2017, Amazon submitted its reply to the Commission's request for information of 19 May 2017.

(84)

By email of 14 June 2017, the Commission requested Amazon to confirm that all information submitted by Amazon to the Commission in 2016 and 2017 had also been shared with Luxembourg and invited Luxembourg to submit its observations on the information submitted to the Commission by Amazon at that point of the investigation. On 19 June 2017, Amazon confirmed to have shared all information submitted to the Commission in 2016 and 2017 with Luxembourg. By email of 21 June 2017, Luxembourg confirmed to have received all documents that were submitted to the Commission by Amazon in 2016 and 2017 and that Luxembourg had no further comments in relation to Amazon's submissions to the Commission in 2016 and 2017 except for Amazon's submissions of 30 September 2016 and 20 January 2017.

(85)

On 22 June 2017, a meeting was held between the Commission, Luxembourg and Amazon.

(86)

On 6 July 2017, Luxembourg submitted its comments to submissions made by Amazon on 30 September 2016 and 20 January 2017.

(87)

On 6 July 2017, the Commission sent a request for information to Amazon to which Amazon replied on 10 and 27 July, and 4 and 7 August 2017.

(88)

By email of 9 August 2017, the Commission sent a request for information to Amazon. On 7 September 2017, Amazon submitted its reply.

(89)

On 12 September 2017, Luxembourg confirmed by email that it had no further comments to Amazon's submissions of 10 and 27 July, 4 and 7 August and 7 September 2017.

2.   FACTUAL AND LEGAL BACKGROUND

2.1.   DESCRIPTION OF THE BENEFICIARY OF THE CONTESTED TAX RULING

2.1.1.   THE AMAZON GROUP

(90)

The Amazon group consists of Amazon.com, Inc. and all companies directly or indirectly controlled by Amazon.com, Inc. (collectively referred to as ‘Amazon’ or the ‘Amazon group’). Amazon is headquartered in Seattle, Washington, United States of America.

(91)

Amazon operates retail and service businesses.

(92)

Amazon's retail business consists of selling a range of merchandise to customers through its websites, such as books, DVDs, videos, electronic consumer goods, computers, kitchen equipment and housewares, tools, hardware, mobile phones, etc. and content, such as digital music, E-books, games etc., which Amazon purchases for resale from suppliers (12). Amazon fulfils customer orders in several ways, including through its own North American and International fulfilment centres and networks and through co-sourced and outsourced fulfilment arrangements in certain countries and through digital delivery (13).

(93)

Amazon's service business includes its activities in third party programmes (the ‘Third-Party Seller Programs’), such as Marketplace and Merchants@Amazon, through which Amazon allows other (smaller) businesses and individuals (Marketplace) and medium and large retail sellers (Merchants@Amazon) to offer their products for sale on Amazon's websites. The products of the third party merchants are integrated into Amazon's websites. In return, the participating businesses and individuals pay fees to Amazon (14). Those third-party businesses and sellers can also choose to send Amazon their inventory, which Amazon stores at its fulfilment centres (15), lists on all its websites, and picks, packs and delivers to the client's address (the ‘Fulfilment by Amazon’ business) (16).

(94)

Amazon also generates revenue through other marketing and promotional services, such as online advertising and co-branded credit card agreements. Amazon previously offered its e-commerce services, features and technologies to operate other businesses' websites selling its products under the Amazon brand name and URL under its ‘Merchant.com’ programme. Under its ‘Syndicated Stores’ programme, Amazon previously offered its e-commerce services, features and technologies to operate other businesses' websites selling its products under another business name and URL (17). Both programmes have since been phased out (18).

(95)

Finally, Amazon manufactures and sells hardware products, such as Amazon Kindle, Amazon Fire and Amazon Echo devices.

(96)

Amazon operates thirteen global web sites, including www.amazon.com and six European web sites: www.amazon.de, www.amazon.co.uk, www.amazon.fr, www.amazon.it and www.amazon.es (‘the EU websites’) and www.amazon.nl (19). Amazon's operations are organised in three segments: North America, International, and Amazon Web Services (‘AWS’) (20).

(97)

The North America segment's sales primarily consist of retail sales of consumer products (including by third-party sellers) and subscriptions through North America-focused websites such as www.amazon.com, www.amazon.ca, and www.amazon.com.mx. That segment also includes export sales from those websites.

(98)

The International segment's sales primarily consist of retail sales of consumer products (including by third-party sellers) and subscriptions through international websites such as www.amazon.com.au, www.amazon.com.br, www.amazon.cn, www.amazon.in, www.amazon.co.jp, the EU websites and www.amazon.nl. That segment also includes export sales from these international websites (including export sales from these sites to customers in the U.S., Mexico, and Canada), but excludes export sales from Amazon's North American websites.

(99)

The AWS segment consists of global sales of computer, storage, database, and other service offerings for start-ups, enterprises, government agencies, and academic institutions. Through AWS, Amazon provides access to technology infrastructure for different types of business.

(100)

In 2016, Amazon generated worldwide net sales of approximately USD 136 billion and net income of USD 2,37 billion. Globally, 91 % of Amazon's revenue comes from its retail business. 59 % of net sales come from the North America segment, 32 % from the International segment, and 9 % from the AWS segment. In 2016, Amazon had 314 400 full- and part-time employees (21).

2.1.2.   AMAZON'S EUROPEAN OPERATIONS

(101)

Prior to May 2006, Amazon operated its European websites through a wholly-owned US subsidiary of Amazon.com, Inc.: Amazon.com International Sales, Inc. (‘AIS’). AIS functioned as principal for the retail business on Amazon's European websites (at that time: www.amazon.de, www.amazon.co.uk, and www.amazon.fr), whereas another US group company, Amazon International Marketplace, Inc. (‘AIM’), functioned as principal for the service business on those websites. AIM was, in turn, the sole shareholder of ASE, incorporated in 2003, which acted as the service commission agent for the service business on the European websites. Finally, wholly-owned Amazon entities incorporated in the UK, Germany and France (‘EU Local Affiliates’) (22) performed certain services with respect to the European websites, e.g. costumer referral services (23).

(102)

As of May 2006, the restructuring of Amazon's European operations as described in the ruling request (the ‘2006 restructuring’) became effective. During financial years covering 1 May 2006 to 30 June 2014 (‘the relevant period’), the structure reflected in Figure 1 was in place. In July 2014, Amazon restructured its European operations (the ‘2014 restructuring’). The 2014 restructuring and Amazon's European operations as carried out after the 2014 restructuring are not within the scope of this Decision.

Figure 1

Structure of Amazon's European Entities 2006-2014

Image

Cost sharing of R&D

Royalty

Royalty

Service fee

Amazon.de

Amazon.fr

Amazon.co.uk

Amazon Media Europe AMEU

Amazon Services Europe ASE

LuxOpCo

LuxSCS

EU local affiliates

LUX

US

Amazon US

2.1.2.1.    LuxSCS

(103)

LuxSCS is a Luxembourg limited partnership (Société en Commandite Simple). While the ownership structure changed throughout the relevant period, the partners of LuxSCS were always US-resident companies (24). On incorporation in 2004, LuxSCS's partners were Amazon Europe Holding, Inc. (general partner); Amazon.com International Sales, Inc. and Amazon.com International Marketplace, Inc. In May 2006, ACI Holdings, Inc. and Amazon.com, Inc. replaced Amazon.com International Marketplace, Inc. as partners of LuxSCS. Since September 2009, Amazon Europe Holding, Inc. (general partner), Amazon.com International Sales, Inc. and Amazon.com, Inc. were the partners in LuxSCS (25).

(104)

During the relevant period, LuxSCS was expected to function solely as an intangibles holding company for Amazon's European operations, for which LuxOpCo was responsible as the principal operator (26). As described by Amazon in a letter dated 20 April 2006 to the Luxembourg tax administration, LuxSCS's activities were limited to ‘the mere holding’ of the Intangibles and the shares in LuxOpCo. The ‘limited number of legal agreements’ concluded by LuxSCS was the ones ‘necessary for the Luxembourg structure to operate’. LuxSCS would only receive passive income (royalties and interests) from its subsidiaries (27). LuxSCS also provided intercompany loans to LuxOpCo and other group companies (28). LuxSCS had no physical presence or employees during the relevant period.

(105)

In 2005, LuxSCS entered into License and Assignment Agreements For Pre-existing Intellectual Property (the ‘Buy-In Agreement’) with Amazon Technologies, Inc. (‘ATI’) (29) and the CSA as concluded with two Amazon group entities based in the U.S.: A9.com, Inc. (‘A9’) and ATI (30). LuxSCS also entered into an Intellectual Property Assignment and License Agreement with Amazon.co.uk Ltd, Amazon.fr SARL, and Amazon.de GmbH, under which LuxSCS received the trademarks and IP rights to the European websites which had been owned by those EU Local Affiliates until 30 April 2006 (31).

(106)

By means of the Buy-In Agreement and the CSA, LuxSCS obtained the right to exploit and sublicense certain Amazon IP and derivative works thereof (‘the Intangibles’) (32) as held and further developed by A9, ATI and LuxSCS itself (33). LuxSCS obtained those rights to exploit the Intangibles for the purpose of operating the European websites and any other purpose within the European territory (34). In return, LuxSCS had to pay Buy-in Payments (specified in Table 11) and its annual share of the costs relating to the CSA development program (specified in Table 12) (35). According to the CSA, LuxSCS had to use its best efforts to prevent infringements of the Intangibles licensed to it by A9 and ATI (36). Furthermore, as specified in the 2009 amended and restated CSA, LuxSCS was to undertake the functions and risks set out in Exhibit B to the CSA (37).

(107)

According to the CSA, the Intangibles consisted of (i) ‘any and all intellectual property rights throughout the world’, as owned or otherwise held by ATI and LuxSCS as well as certain intellectual property rights held by A9 (38), (ii) all such IP licensed, transferred or assigned to those parties, and (iii) derivative works thereof as assigned to any of the parties pursuant to the CSA. The Intangibles essentially include three categories of intellectual property, which is hereinafter referred to as (i) ‘Technology’ (39), (ii) ‘Customer Data’ (40), and (iii) ‘Trademarks’ (41). The Intangibles do not include internet domain names (42).

2.1.2.2.    LuxOpCo and its subsidiaries

(108)

During the relevant period, LuxOpCo was a wholly-owned subsidiary of LuxSCS (43). As part of the 2006 restructuring, it was expected to take over the roles of ASI and AIM (44). It was also expected to further develop and improve the software-based business model underlying Amazon's European retail and service business (45). As expected, during this period LuxOpCo functioned as the headquarters of the Amazon group in Europe and the principal operator of Amazon's European online retail and service business as carried out through the EU websites (46). LuxOpCo would further manage the strategic decision-making related to the retail and services businesses carried out through the EU websites, along with the management of key physical components of the retail business (47). It was expected to set the strategies and guidelines regarding which products would be featured and sold on the EU websites, the pricing and merchandising strategies for the products sold or service offerings, and certain website promotions and advertising programmes offered on the EU websites. It would also be responsible for strategic decisions relating to the selection of third-party merchants and product categories, and for marketing towards third parties. Finally, it would manage all aspects of the order fulfilment business (48).

(109)

During the relevant period, LuxOpCo recorded revenue in its accounts both from product sales and from order fulfilment services. It purchased goods for resale from vendors located in various jurisdictions which were, in turn, shipped to end customers who made purchases on the EU websites. LuxOpCo was the seller of record (49) of Amazon inventory on the EU websites, held title to the inventory, and bore the risk of any loss in that respect (50). LuxOpCo was also responsible for the goods shipped by third-party businesses and individuals directly to the fulfilment centres (51).

(110)

LuxOpCo also performed treasury management functions (52) and held (either directly or indirectly) the shares in ASE, AMEU and the EU Local Affiliates which performed various intra-group services in support of LuxOpCo's business.

(111)

During the relevant period, ASE and AMEU, both Luxembourg resident companies, formed a fiscal unity with LuxOpCo for Luxembourg tax purposes in which LuxOpCo operated as the parent of the unity (53). Under Luxembourg tax law, those domestic companies were therefore not treated as separate entities, but paid their taxes on a consolidated basis, i.e. as if they were one single taxpayer (54).

(112)

After the 2006 restructuring, ASE was expected to continue to act as a service provider to LuxOpCo (55). During the relevant period, it operated Amazon's EU third-party seller business, ‘Marketplace’. Marketplace offers small businesses and sellers the possibility to make their goods available through the EU websites. It also allowed them to send their inventory to Amazon, which was stored at Amazon's fulfilment centres and which Amazon picked, packed and delivered anywhere in Europe. During the relevant period, AMEU operated Amazon's EU digital business (in which, for instance, MP3s and eBooks are sold).

(113)

In 2013 and 2014, the consolidated net turnover of LuxOpCo amounted to EUR 13 612 449 784 and EUR 15 463 362 589, respectively. During the financial year 2013, LuxOpCo employed on average 523 full time employees (‘FTEs’), ASE 63 FTEs and AMEU 5 FTEs. The employees of LuxOpCo, ASE and AMEU included strategic management posts that manage and coordinate the entirety of Amazon's European operations (56).

(114)

After the 2006 restructuring, the EU Local Affiliates were expected to continue to provide the same services to LuxOpCo with respect to the EU websites as they had previously provided to AIS and AIM (57). Accordingly, during the relevant period the EU Local Affiliates provided customer referral services with respect to the EU websites by performing costumer and merchant services, support services (such as marketing support localisation and adaption support, research and development (‘R & D support’) as well as fulfilment services (58). The EU Local Affiliates developed local content for use on the EU websites and supported the management of merchandise for the online retail stores, as required by LuxOpCo. Customer service support entailed providing pre-sale and after-sale customer support service via email, telephone, chat or other means of communication, as required by LuxOpCo, to meet customer requirements. The support services included general and administrative support. Finally, the EU Local Affiliates also supported the soliciting of the operators of other local websites to promote the EU websites to their customers (the so-called ‘Associates Programme’).

(115)

Services provided by the EU Local Affiliates to LuxOpCo were provided pursuant to the ‘Service Agreements’ concluded between each of the affiliates and LuxOpCo as of 1 May 2006 (59). The EU Local Affiliates acted in their own name when providing these services for LuxOpCo, but they did not assume any risks either for the sales or for the inventories (60). Pursuant to the Service Agreements, the EU Local Affiliates were remunerated by LuxOpCo on a cost plus basis (61), reflecting the EU Local Affiliates' role relative to LuxOpCo (62). In practice, the costs incurred by the EU Local Affiliates in performing the services rendered for LuxOpCo were invoiced to LuxOpCo with an additional mark-up ranging from 3 % to 8 %. In 2013, the EU Local Affiliates recorded the following turnovers: Amazon.co.uk Ltd: GBP [400-500] million; Amazon Logistik GmbH: EUR [100-200] million; Amazon.de GmbH: EUR [90-100] million; Amazon.fr Logistique SAS: EUR [100-200] million; and Amazon.fr SARL: EUR [50-60] million.

2.1.2.3.    The License Agreement

(116)

With effect from 30 April 2006, LuxOpCo entered into the License Agreement with LuxSCS. Under that agreement, LuxOpCo irrevocably obtained the exclusive right to develop, enhance, and exploit the Intangibles for the purpose of operating the EU websites and any other purpose within the European Country (63) geographic territory (64) in return for a royalty payment (the ‘License Fee’) (65). Any IP created by or further developed by LuxOpCo on the basis of or as a result of access to the Intangibles (66) is assigned to LuxSCS (67). LuxOpCo was required to act on its own initiative and risk to protect and maintain the Intangibles (68). The License Agreement also provided for corporate services to be provided by LuxOpCo for the benefit of LuxSCS without any separate remuneration to LuxOpCo (69). LuxOpCo further agreed to take over all risks associated with all the activities to be performed by it under the License Agreement (70). If LuxOpCo acquired any IP to be used for the same purpose as the Intangibles from third parties, LuxOpCo was required to license this IP to LuxSCS on a royalty-free basis (71).

(117)

LuxOpCo, ASE, AMEU and EU Local Affiliates used the Intangibles to carry out their business activities (72).

(118)

Under the License Agreement, LuxOpCo had the right to sub-license the Intangibles to affiliated companies (73). As of 30 April 2006, LuxOpCo concluded an ‘Intellectual Property License Agreement’ with both ASE and AMEU, under which ASE and AMEU were irrevocably granted non-exclusive licenses to the Intangibles. To a very large extent, both those agreements mirrored the License Agreement between LuxOpCo and LuxSCS. Under those agreements, a royalty payable by ASE and AMEU to LuxOpCo was set in exactly the same manner as the royalty payable by LuxOpCo to LuxSCS under the License Agreement.

(119)

Pursuant to the Service Agreements, the EU Local Affiliates were entitled to use the Intangibles as well as other intangible property and trademarks owned or otherwise held by LuxOpCo to the extent necessary for the provision of their services to LuxOpCo. All goodwill from such use solely accrued for the benefit of LuxOpCo (74). All intellectual property rights and derivative works thereof as developed or acquired by the EU Local Affiliates during the provision of those services remained the property of LuxOpCo (75).

(120)

The License Agreement was in effect for the life of all the licensed Intangibles (76), and could only be terminated in the event of a change of control or substantial encumbrance (77) or in the event of one of the parties failed to cure for failure of its performance under that agreement (78). Accordingly, LuxSCS had no possibility to unilaterally terminate the License Agreement. The License Agreement was amended in January 2010, with effect from 1 January 2009 (79). That amendment concerned the definition of ‘EU Operating Profit’ used for the purpose of calculating the License Fee (80).

2.2.   THE CONTESTED MEASURE

2.2.1.   THE CONTESTED TAX RULING

(121)

The contested tax ruling is a one-sentence letter dated 6 November 2003 from the Luxembourg tax administration to Amazon.com, Inc. which states the following:

‘After having made myself acquainted with the letter of october [sic] 31, 2003, directed to me by [Advisor 1] just as with your letter of octobre [sic] 23, 2003 and dealing with your position regarding Luxembourg tax treatment within the framework of your future activities, I am pleased to inform you that I may approve the contents of the two letters.’

(122)

Following a delay in the implementation of the restructuring of Amazon's European operations, Amazon sought confirmation from the Luxembourg tax administration of the continued validity of the contested tax ruling by letter of 5 December 2004, which the latter confirmed by letter of 23 December 2004 (81). The contested tax ruling, initially concluded for five years, was prolonged in 2010 and effectively used until June 2014 (82).

2.2.2.   THE LETTER OF 31 OCTOBER 2003

(123)

In its letter of 31 October 2003 to the Luxembourg tax administration (‘Amazon's letter of 31 October 2003’), Amazon sought confirmation of the tax treatment of LuxSCS, its US-based partners and dividends received by LuxOpCo under that structure. That letter explains that LuxSCS, as a Société en Commandite Simple, is not deemed to have a separate tax personality from that of its partners and, as a result, it is not subject to corporate income tax or net wealth tax in Luxembourg.

(124)

Notwithstanding the tax transparency of LuxSCS, LuxSCS or its US-based partners could still be taxed in Luxembourg if their activities were deemed to be carried out through a permanent establishment in Luxembourg. The letter therefore further explains that neither LuxSCS nor its partners could be considered to have a tangible presence in Luxembourg (offices, employees etc.) so that, in the absence of a fixed place of business, LuxSCS would not be deemed to have a separate personality from its partners nor to carry out a commercial activity in Luxembourg (83). Nor could its partners be regarded as having a permanent establishment in Luxembourg.

2.2.3.   THE LETTER OF 23 OCTOBER 2003

(125)

In its letter of 23 October 2003 to the Luxembourg tax administration (‘Amazon's letter of 23 October 2003’), Amazon requested a tax ruling confirming the treatment of LuxOpCo for Luxembourg corporate income tax purposes (84). That letter explains Amazon's envisaged business structure in Europe and seeks confirmation that the transfer pricing arrangement for the License Agreement described therein results in ‘an appropriate and acceptable profit’ for LuxOpCo ‘with respect to the transfer pricing policy and Articles 56 and 164(3) of the LITL’.

(126)

That letter refers to an ‘economic analysis’ attached thereto, which sets out ‘the functions and risks that LuxOpCo was anticipated to undertake, as well as the nature and extent of the Intangibles that are anticipated to be the subject of the Intangibles License’ concluded between LuxSCS and LuxOpCo. On the basis of that analysis, a transfer pricing arrangement was proposed under which the level of the annual royalty (referred to in the letter as the ‘License Fee’) that LuxOpCo would be required to pay to LuxSCS for the use of the Intangibles was established.

(127)

Pursuant to that arrangement, the annual royalty would be equal to a percentage of all revenue (the ‘Royalty Rate’) received by LuxOpCo in connection with its operation of the EU websites. As further set out in that letter, the License Fee and the Royalty Rate would be calculated by use of the following method (85):

‘1.

Compute and allocate to LuxOpCo the ‘LuxOpCo Return’, which is equal to the lesser of (a) [4-6] % of LuxOpCo's total EU Operating Expenses for the year and (b) total EU Operating Profit attributable to the European Web Sites for such year;

2.

The License Fee shall be equal to EU Operating Profit minus the LuxOpCo Return, provided that the License Fee shall not be less than zero;

3.

The Royalty Rate for the year shall be equal to the License Fee divided by total EU Revenue for the year;

4.

Notwithstanding the foregoing, the amount of the LuxOpCo Return for any year shall not be less than 0,45 % of EU Revenue, nor greater than 0,55 % of EU Revenue;

5.

(a)

In the event that the LuxOpCo Return determined under step (1) would be less than 0,45 % of EU Revenues, the LuxOpCo Return shall be adjusted to equal the lesser of (i) 0,45 % of Revenue or EU Operating Profit or (ii) EU Operating Profit;

6.

(b)

In the event that the LuxOpCo Return determined under step (1) would be greater than 0,55 % of EU Revenues, the LuxOpCo Return shall be adjusted to equal the lesser of (i) 0,55 % of EU Revenues or (ii) EU Operating Profit.’

(128)

For the purpose of the Royalty Rate Computation the following definitions apply (86):

 

‘EU COGS’ means Costs of Goods Sold, computed using US GAAP (Generally Accepted Accounting Principles), attributable to LuxOpCo's operation of the European Web Sites.

 

‘EU Operating Expense’ means LuxOpCo's total costs, including intercompany expenses, but excluding: EU COGS, the License Fee, currency gains and losses and interest expense, calculated under U.S. GAAP.

 

‘EU Revenues’ means total net sales revenue earned by LuxOpCo through the EU Web Sites, which shall be equal to the sum of (a) the total sales prices of products sold by LuxOpCo, stated on the invoices which are issued to customers, including revenue attributable to gift wrapping and shipping and handling, less: value added taxes, returns and other allowances, and (b) total services revenue earned by LuxOpCo in connection with the sale of products or services by unrelated parties through the EU Web Sites, less value added taxes.

 

‘EU Operating Profit’ means EU Revenue minus: EU COGS and EU Operating Expenses.

2.2.4.   THE TRANSFER PRICING REPORT

(129)

In response to the Opening Decision, Luxembourg submitted the TP Report (87). Luxembourg claims that the TP Report is the ‘economic analysis’ to which reference is made in Amazon's letter of 23 October 2003. The TP Report was drawn up by reference to the Transfer Pricing Guidelines for Multinational Enterprises and Tax Administrations prepared by the Organisation for Economic Cooperation and Development.(‘OECD TP Guidelines’) (88).

2.2.4.1.    Functional analysis

(130)

Section 3 of the TP Report provides a functional analysis of LuxSCS and LuxOpCo.

(131)

According to that functional analysis, LuxSCS's principal activities will be limited to those of an intangible holding company and a participant in the ongoing development of the Intangibles through the CSA (89). LuxSCS will also license the Intangibles to LuxOpCo, subject to the License Agreement, and will receive royalty payments pursuant to that agreement.

(132)

As regards LuxOpCo, the TP Report explains that ‘[t]hrough its staff of full-time management employees, LuxOpCo will manage the strategic decision-making related to the EU Web Sites' Retail and Services Businesses, and will also manage the key physical components of the Retail Business’ (90). According to Amazon's letter of 23 October 2003, LuxOpCo was expected to have ‘in total, at least 25 to 30 full-time employees, including certain key pan-European management with responsibility for strategic decision-making in connection with the EU Web sites’ (91), with the remaining full-time employees (approximately 20) to function in areas such as marketing, technology and accounts payable.

(133)

The TP Report further explains that ‘[f]ollowing the restructuring, it is anticipated that LuxOpCo's principal activities will be focused on the exploitation of Amazon's software platform in an effort to continually develop and improve the software-based business model underlying the Retail Business and Service Business offered through the EU Websites. […] (*2) As part of this effort, LuxOpCo's management will work to identify opportunities to improve and enhance the Retail and Service Businesses through the exploitation of new and improved platform features and functionality as they are developed. As both a retailer and service provider, LuxOpCo will strive to provide the optimal costumer experience in all areas including fulfilment, payment, processing, merchandising decisions and monitoring of third-party seller performance […]’ (92).

(134)

In its role as retailer, LuxOpCo was expected to take merchandising and pricing decisions, and to manage all aspects of the order fulfilment process (93). As the operator of the service business, LuxOpCo would also be ‘responsible for strategic decisions relating to the selection of third-party merchants and product categories, and for marketing to and negotiations with third-party merchants’ (94). For the purpose of operating the EU websites, LuxOpCo was to use the Intangibles which it licensed from LuxSCS. LuxOpCo was expected to hold legal title to all inventory (95). LuxOpCo would assume all risks associated with holding inventory and selling products through the EU websites (96). According to Amazon's letter of 23 October 2003, LuxOpCo was to own and use the Luxembourg-based transaction processing servers to complete the processing of, and authorise payments for, customer and third-party seller transactions, including payments to third-party merchants (97).

(135)

LuxOpCo was to contract with ASE, which would act as a service commission agent in its own name but for the benefit of LuxOpCo, in connection with Amazon's third-party seller programs in Europe. ASE's services would primarily consist of certain order processing services associated with the service business.

(136)

The EU Local Affiliates located in Germany, France and the UK were to provide various services with respect to the EU websites, including certain customer referral and support, marketing and fulfilment services (98).

(137)

According to Amazon's management forecasts submitted for the purpose of the TP Report, LuxOpCo was expected to expand its revenues in the course of its operations from approximately EUR 3,2 billion in 2005 to approximately EUR 8,3 billion in 2010 and incur the following costs: the cost of goods as a percent of revenue was projected on average at approximately 77,5 %, leading to a gross margin of about 22,5 %. Following the 2006 restructuring, LuxOpCo was to assume the on-going costs associated with the management and operation of the Amazon platform in Europe, including payment and collection processing expenses, bad debt expenses, certain system support expenses, as well as the cost of salaries of the management, technology and other personnel working to support the Amazon platform operations in the region (99). The assumptions underlying the management forecast were neither disclosed nor reviewed in the TP Report (100).

2.2.4.2.    Selection of the most appropriate transfer pricing method

(138)

Section 5 of the TP Report deals with the selection of the most appropriate transfer pricing method for determining the arm's length nature of the Royalty Rate.

(139)

To determine the remuneration attributable to LuxOpCo and the arm's length level of the royalty to be paid by LuxOpCo to LuxSCS under the License Agreement, the TP Report proposes alternative transfer pricing arrangements: one based on the comparable uncontrolled price (‘CUP’) method and another based on the residual profit split method (101).

2.2.4.3.    Transfer pricing assessment based on the CUP method

(140)

Section 6.1 of the TP Report calculates an arm's length range for royalty on the basis of the CUP method.

(141)

First of all, searches were performed for comparable transactions in Amazon's own internal database of license agreements and an external agency was commissioned to conduct a search for license agreements involving intangible assets similar to those of Amazon. The transactions identified as a result of the searches were not considered sufficiently comparable and were therefore rejected for the purpose of the CUP analysis.

(142)

Next, the TP Report identified as relevant the following agreements entered into by Amazon since 2000 with third-party retailers under which Amazon made its technology platform available to those retailers: the Strategic Alliance Agreement between Rocket.zeta, Inc., Amazon.com, Inc., target.direct LLC and Target Corporation (the ‘Target Agreement’) (102), the Strategic Alliance Agreement between Rock-Bound, Inc. and ToysRUs.com LLC (the ‘ToysRUs Agreement’); the Product Listing Agreement between Amazon.com Payments, Inc and Circuit City Stores, Inc. (the ‘Circuit City Agreement’); the Mirror Site Hosting Agreement between Frontier.zeta, Inc. and Borders Online LLC (the ‘Borders Agreement’); and the Mirror Site Hosting Agreement between Amazon.com International Sales, Inc. and Waterstone's Bookseller Ltd (the ‘Waterstones Agreement’). Amazon refers to these agreements as the ‘M.com Agreements’. Upon review of those agreements, the TP Report concludes that the [A] Agreement provides a comparable arrangement to the extent that the rest of the contracts ‘did not include the provision of the eCommerce technology platform’ (103).

(143)

Pursuant to the [A] Agreement, Amazon agreed to create, develop, host and maintain a new [A] website and a [A] store on Amazon websites, which were to replace [A]'s existing e-commerce website. The functionalities to be included in the [A] website would be substantially equivalent to those generally incorporated in the Amazon websites. In return, [A] was to pay Amazon compensation consisting of, among others, set-up fees (104), base fees (105), and sales commissions (106).

(144)

To make that compensation comparable to the License Fee (referred to in the TP Report as the ‘Royalty Rate’), the set-up fees were amortized and allocated to each of the four periods referred to in the agreement and, together with the annual basic fee, they were converted into a percentage of sales (ranging from 3,4 % to 7,2 %). Since the commission fee included in the [A] Agreement ranged from 4 % to 5 % of sales, the TP Report's first conclusion was that the implied royalty rate in the [A] Agreement ranged from 8,4 % to 11,7 % of sales. However, [A] had also committed to pay Amazon certain fees to compensate for both excess order capacity and excess inventory level. Those fees, referred to in the agreement, were also converted into a percentage of sales, ranging from 1,2 % to 0,7 %. Therefore, the arm's length range for the Royalty Rate was initially calculated to be between 9,6 % and 12,6 % of sales.

(145)

Finally, since the [A] Agreement did not provide [A] with access to Amazon's customer data, the TP Report included an adjustment to align the CUP with the fact that LuxSCS granted LuxOpCo access to Amazon's customer data. Accordingly, using the information available in the [B] Agreement, an upward adjustment of 1 % was proposed, resulting in an arm's length range for the Royalty Rate between 10,6 % and 13,6 % of LuxOpCo's sales.

2.2.4.4.    Transfer pricing assessment based on the residual profit split method

(146)

Section 6.2 of the TP Report calculates an arm's length range for the License Fee (referred to in the TP Report as the ‘Royalty Rate’) on the basis of the residual profit split method. In its application of that method, the TP Report estimated the return associated with LuxOpCo's ‘routine functions in its role as the European operating company’ (107) based on the mark-up on costs to be incurred by LuxOpCo (108).

(147)

To determine an arm's length range for that mark-up, the TP Report conducted a search to identify comparable companies generally identified as engaged in the management and operation of software-based business. A comparable companies search in the Amadeus database (109) using selection criteria related to geographic region (110), keyword search in business descriptions (111) and industry classification of the search combined with manual screening identified seven companies considered comparable to Amazon (112).

(148)

On that basis, the TP Report defined a ‘net cost plus mark-up’ as the profit level indicator for testing the arm's length remuneration attributable to the anticipated functions of LuxOpCo, which was defined as operating income divided by the sum of cost of goods and operating expenses (113). Based on data concerning the seven comparables, the following three-year average (1999-2001) interquartiles range was presented: lower quartile was 2,3 %, median was 4,2 %, and upper quartile was 6,7 %. The table presenting the results indicates that the figures are percentages of net sales (114).

(149)

As a result, a mark-up of [4-6] % was selected and applied to the operating expenses of LuxOpCo to determine ‘the relevant routine return attributable to LuxOpCo's functions’ (115). That return was subsequently deducted from LuxOpCo's operating profit. The resulting difference between that return and LuxOpCo's recorded profit, the residual profit, was considered by the TP Report to be wholly attributable to the use of the Intangibles licensed from LuxSCS.

(150)

Finally, the TP Report divided each of the projected annual residual profits by the projected net sales of LuxOpCo to obtain an indication of the Royalty Rate. On that basis, the TP Report concluded that ‘a Royalty Rate in a range of 10,1 to 12,3 percent of net revenues to be charged by LuxSCS to LuxOpCo would be consistent with the arm's length standard under the OECD Guidelines’ (116).

(151)

The calculations made in the TP Report, are summarised and illustrated in Table 1 (117). Columns 1 and 3 have been added by the Commission to explain those calculations:

Table 1

Calculation in the TP Report, cf. p. 32 of the TP report (Column 1 and 3 added by the Commission)

(EUR million)

1

2

3

4

5

6

7

8

9

 

 

 

2005

2006

2007

2008

2009

2010

a

Revenue

 

3 154,2

4 299,9

5 073,9

5 987,1

7 064,7

8 336,3

b

COGS

 

2 446,9

3 332,7

3 932,6

4 640,5

5 475,8

6 461,4

c

Gross Profit

a – b

707,3

967,2

1 141,3

1 346,6

1 588,9

1 874,9

d

Operating expense

 

89,9

106,0

121,7

143,7

171,2

204,2

e

Intercompany (co.uk, .de, .fr)

 

279,4

338,4

395,6

456,2

524,1

602,7

f

LUX Commissionaire expense

 

2,8

3,4

4,1

4,9

5,9

7,0

g

Operating expense (incl. Intercompany)

d + e + f

372,1

447,8

521,4

604,8

701,2

813,9

h

Estimated Operating Net Profit (Loss) before Routine Return

c – g

335,2

519,4

619,9

741,8

887,7

1 061,0

i

Routine Return to LuxASE

 

0,14

0,17

0,20

0,24

0,29

0,35

j

Routine Return to LuxOpCo

[4 – 6] % × g

16,8

20,2

23,5

27,2

31,6

36,6

k

Estimated Residual Profit Payable to LuxSCS

h – i – j

318,3

499,1

596,2

714,3

855,8

1 024,0

l

Effective Royalty Rate (as % of Revenue)

k/a

10,1 %

11,6 %

11,8 %

11,9 %

12,1 %

12,3 %

2.2.4.5.    Reconciliation of the two transfer pricing arrangements

(152)

Summarising the transfer pricing analyses of the License Agreement using the CUP method and the residual profit split method, the TP Report considered that the results converge and indicated that an arm's length range for the Royalty Rate from LuxOpCo to LuxSCS under that agreement is 10,1 % to 12,3 % of LuxOpCo's sales.

(153)

The TP Report then concludes that ‘while it is reasonable to conclude that a Royalty Rate chosen from within the range of royalty rates implied by both these methods would be consistent with the arm's length principle, there may be minor differences in the precise future Intangibles transferred under the [A] agreement that would account for the slight differences in results under the two methods. […] it is reasonable to conclude […] that the residual profit split analysis is less likely to produce biased estimates, and accordingly, may be considered to be a more reliable measure of the arm's length Royalty Rate’ (118).

2.2.5.   CONSEQUENCES OF THE CONTESTED TAX RULING

(154)

By the contested tax ruling, the Luxembourg tax administration endorsed the contents of Amazon's letters of 23 and 31 October 2003. In particular, it accepted that the transfer pricing arrangement for the purposes of determining the level of the annual royalty to be paid by LuxOpCo to LuxSCS under the License Agreement, which in turn determined LuxOpCo's annual taxable income in Luxembourg, was at arm's length. That arrangement is summarised in Figure 2:

Figure 2

Structure of Amazon's European Entities 2006-2014 incl. arrangement for royalty payment

Image

Taxable profit of LuxOpCo agreed in the contested ruling

Recorded profit in excess of taxable profit agreed in the contested roling is paid by LuxOpCo to LuxSCS in the form of a royalty

0,45 % on sales

[4-6] % on OpEx

0,55 % on sales

Amazon.com, Inc.

US

LUX

LuxSCS

Royalty

Amazon EU Sàrl LuxOpCo

EU Sales invoiced and recorded in Luxembourg

EU Subsidiaries

Amazon.co.uk

Amazon.fr

Amazon.de

(155)

The contested tax ruling was relied upon by LuxOpCo during the relevant period to determine its annual corporate income tax liability in Luxembourg for the purpose of filing its annual tax declarations. The contested tax ruling was also relied upon by LuxSCS and its US-based partners in that it confirms that neither LuxSCS nor its partners are subject to Luxembourg corporate income tax, municipal business tax or, for the latter, tax on their partnership interest in LuxSCS (119).

(156)

Table 2 illustrates the implications of the contested tax ruling for the calculation of LuxOpCo's taxable base in Luxembourg and the level of the royalty payment (the License Fee) to LuxSCS since 2006. The Commission recalls that LuxOpCo operates as the parent entity in the fiscal unity formed with ASE and AMEU, and that those companies are accordingly treated as one single tax payer for Luxembourg tax purposes. Accordingly, Table 2 is drawn up on a consolidated basis, and no distinction is made between LuxOpCo, ASE and AMEU in the following parts of this Decision.

Table 2

Calculation of LuxOpCo's taxable base and royalty payments 2006-2013

(EUR million)

Luxembourgish fiscal unity group

2006

2007

2008

2009

2010

2011

2012

2013

Total revenue

1 979,4

3 545,7

4 298,6

5 605,4

7 628,8

10 086,3

13 312,1

[15 000 – 15 500 ]

Net COGS

1 610,8

2 828,3

3 406,1

4 421,6

6 084,4

8 078,0

10 486,6

[11 500 – 12 000 ]

Total operating expense

262,5

476,8

530,0

637,6

918,3

1 461,7

2 252,9

[3 000 – 3 500 ]

Thereof

Expenses applicable to mark-up

262,5

439,9

493,6

597,0

801,9

1 313,1

2 041,7

[2 500 – 3 000 ]

Thereof

LuxOpCo - OpEx

78,6

162,6

203,6

258,4

317,7

483,1

662,7

[800 – 900]

LuxOpCo - Intercompany

183,8

277,3

290,0

338,6

484,1

830,1

1 379,0

[1 500 – 2 000 ]

Expenses excluded from mark-up (Mngt and RSU)

0,0

36,9

36,4

40,6

116,4

148,5

211,2

[200 – 300]

Resulting operating profit

106,1

240,5

362,6

546,2

626,1

546,6

572,7

[600 – 700]

Estimated Total Return to Lux Fiscal Unity Group at [4-6] % of adjusted OpEx

11,8

19,8

22,2

26,9

36,1

59,1

91,9

[100 – 200]

Ceiling/floor analysis

Profit ceiling (0,55 % of revenue)

10,9

19,5

23,6

30,8

42,0

55,5

73,2

[80 – 90]

Profit floor (0,45 % of revenue)

8,9

16,0

19,3

25,2

34,3

45,4

59,9

[60 – 70]

Luxembourg consolidated Profit - per Ceiling/Floor and Return

10,9

19,5

22,2

26,9

36,1

55,5

73,2

[80 – 90]

Royalty payment (Lux fiscal unity group to LuxSCS)

95,2

221,0

340,4

519,3

590,0

491,1

499,4

[500 – 600]

(157)

According to the calculation of the License Fee to LuxSCS (120), the cost base used to determine LuxOpCo's taxable basis for Luxembourg tax purposes are its operating expenses and the costs incurred by the EU Local Affiliates which are subsequently reimbursed by LuxOpCo (specified in Table 2 as ‘LuxOpCo — Intercompany’). The costs of goods sold and certain other costs, referred to as ‘expenses excluded from the mark-up (Mngt and RSU)’ in Table 2, are excluded from the calculation of LuxOpCo's taxable profit. The latter category of expenses comprises the following costs: (i) as from 2008, charges by US affiliates of Amazon.com, Inc. for support services (121), which were not foreseen at the time of the contested tax ruling; (ii) beginning in 2010, Amazon.com, Inc. charged LuxOpCo for the shares awarded as stock compensation to employees of LuxOpCo and certain of its direct and indirect European subsidiaries (122). Amazon claims that those charges did not change the functions and risks of LuxOpCo.

(158)

The application of the [4-6] % mark-up on the sum of LuxOpCo's operating expenses and intercompany expenses produces the Estimated Total Return To Lux Fiscal Unity Group. This result is then tested against the ceiling and the floor criteria (0,55 % and 0,45 % of revenues respectively). In cases where the Estimated Total Return was higher than 0,55 % of the revenues (as in years 2006, 2007, 2011, 2012 and 2013), the application of the ceiling was determinant for assessing LuxOpCo's taxable income in Luxembourg, referred to in Table 2 as the ‘Luxembourg consolidated Profit – per Ceiling/Floor and Return’.

(159)

Finally, the Luxembourg consolidated Profit (referred to as the LuxOpCo return in the ruling request) is subtracted from the operating profit (referred to as the ‘EU Operating profit’ in the ruling request) to determine the License Fee due to LuxSCS.

2.3.   ADDITIONAL INFORMATION SUBMITTED IN THE COURSE OF THE FORMAL INVESTIGATION

(160)

During the course of the investigation, Amazon provided information on the European online retail market, on its business model in general and on its European operations in particular, on the IP licensing agreements it concluded with unrelated entities, and on its new corporate and tax structure in Luxembourg with effect from June 2014. That information complements the information already presented in Sections 2.1 and 2.2.

2.3.1.   INFORMATION ON THE EUROPEAN ONLINE RETAIL MARKET

(161)

The European online retail market was the subject of a report commissioned by Amazon from [Advisor 3], a consultancy company, which contains an analysis of the economic trends of the e-commerce sector in Europe (‘the [Advisor 3] Report’) (123). The [Advisor 3] Report describes ‘online retail’ as the online sales of physical goods by online retailers, i.e. operators purchasing goods, holding them in their inventory and selling them online (124).

(162)

According to that report, the activities of online retailers are more similar to the activities of physical retailers, than to that of digital service providers (125). The main difference between physical retailers and online retailers lies in the product distribution channel used (126). The study also indicates that online retailers are structurally less profitable than digital service providers, since online retailers have an essentially variable costs basis. The costs structure of digital service providers is more fixed than that of retailers, which allows for economies of scale and higher margins once a company has reached a critical size (127). For retailers, be it physical or online, the impact of economies of scale on the profitability is limited, since the vast majority of costs are variable. Changes in the cost of goods sold, discounts and logistics costs, which are a major share of the total costs, are strongly linked to business volumes (128). This factor, together with the intense competition characteristic to the online retail sector, resulted in negative average EBIT margins on the European online retail market. In the period 2006-2013, the relation of the average EBIT margin to sales was – 0,5 %.

(163)

The [Advisor 3] report's analysis of the market dynamics in the five most populated countries in Europe (129) shows that ‘the online retail segment experienced a strong growth and was subject to intense competition between 2006 and 2013’ (130). In particular, ‘[t]he intensity of competition required online retailers to invest heavily to sustain the market segment growth and keep up with the competition, thus putting margins under pressure when not pushing them into negative territory. Online retailers were willing to sacrifice short-term profitability, with the hope that investments undertaken would generate profit in the long run’ (131). The report concludes that in order to succeed on competitive European retail markets, it is necessary to consider the specific local features of these markets (132).

2.3.2.   INFORMATION ON AMAZON'S BUSINESS MODEL

2.3.2.1.    The ‘three pillars’ of Amazon's retail business model

(164)

According to Amazon (133), the key drivers of its retail business are selection (product/merchandise offerings (134)), price, and convenience (easy-to-use functionality, fast and reliable fulfilment, timely customer service, feature-rich and authoritative content, as well as a secure transaction environment) (135), whereby selection comes first, then price, and then convenience (136). These key drivers are referred to by Amazon as the ‘three pillars’ (137), and are traditional retail objectives (138). According to Amazon, executing the three pillars is critical and requires uniqueness and innovation in product offering, technology, business line, geography etc. (139), depending mainly on human intervention. The three pillars must be adapted to each local market where Amazon operates (140).

(165)

Selection: According to Amazon, selection is one of the key drivers of its success. Amazon employees define it as offering customers everything they may want to buy, which requires identification of customers' tastes and buying preferences in a given market, recruiting relevant suppliers and ensuring that the products are in stock (141). According to Amazon, there is a tightly linked correlation between selection and revenue (142). Amazon strives to have the widest selection possible and to continuously grow the number of products offered (143). Amazon continuously expands its selection, because the broader the selection, the better the customer experience (144).

(166)

Since preferences are local and category and vendor preferences differ by geography (145), selection is also local, as tastes and cultures are locally different (146). This can be seen from comparing Amazon's top selling items, which are different in each country (147). The goal and main responsibility on country level is to build a business mainly focused on physical retail and to create a relevant selection for the customer (148). The creation of such a relevant selection happens through personal negotiation (humans with humans) (149).

(167)

Within Amazon, selection is created in three ways: (i) through the acquisition of companies, (ii) partnerships with suppliers, and (iii) third-party programmes, such as Marketplace. For instance, Amazon started its tool business in the US by acquiring an existing company that already sold tools to access the existing vendor relationships and the selection that Amazon wanted to add to its retail business (150). Partnering with suppliers requires specific market know-how and building trust with suppliers (151). Once a partnership is established with a supplier, local vendor managers have to maintain that relationship, respecting the conditions of the suppliers and knowing the local market. Amazon's Marketplace offers other retailers the use of Amazon's platform for their e-commerce business, even if they are direct competitors of Amazon. Amazon created the technical account management (‘TAM’), which is the contact point for technical questions of Marketplace sellers after their launch on the Amazon websites. Amazon also developed its technology to allow self-service sign up for potential sellers on the Marketplace and, by 2010/2012, self-service sign up became more important for Amazon's Marketplace business (152).

(168)

Price: According to Amazon, price is its second most important business driver. Amazon endeavours to keep prices as low as possible (153). While manual pricing was predominantly used at Amazon until 2009 (154), prices have since been set by a pricing algorithm.

(169)

Convenience: According to Amazon, its third business driver is convenience. Convenience consists of several goals aimed at facilitating and improving the customer experience, such as (i) helping customers find what they are searching for, while ensuring complete product information for the customer, and (ii) delivering purchased products as quickly and accurately as possible (155).

2.3.2.2.    Online marketing efforts

(170)

In addition to selection, price and convenience, Amazon's online marketing efforts are a key driver to bring traffic to Amazon websites and increase retail sales (156).

(171)

Prior to 2003, Amazon cooperated with international advertising agencies to support its marketing efforts. This changed in 2003, when Amazon started to pursue its own online marketing efforts. One of Amazon's main online marketing tools is its ‘Associates Program’ (157), which is a key traffic driving initiative (158). Amazon developed the Associates Program to establish marketing partnerships with so-called ‘associated websites’ that advertise Amazon or its products to channel internet traffic to Amazon websites (159).

(172)

Once the technology for the Associates Program was developed, it had to be integrated in each country with local associate websites. Consequently, the implementation of the Associates Program could only be done locally (160). Therefore, Amazon's Associates Program team was split in a ‘software team’ and a ‘recruitment team’ (i.e. a business development team). While the software team was based entirely in Seattle, the recruitment teams were established locally in countries where Amazon operated a website (161), such as Germany, the UK, and Japan (162).

(173)

The selection of the most relevant local partner websites (websites that advertise Amazon products) for the Associates Program, which would subsequently increase traffic to Amazon's websites, requires local market know-how (163). Therefore, the network of associated websites is created by local Amazon teams. This includes recruiting the local websites (including the EU websites), establishing the association fee, and controlling instances of fraud. This process starts with large players like Google and goes down to special interest websites with few visitors. All agreements are negotiated locally, because local conditions have to be considered for search engine optimisation, even with global websites such as Google (164).

2.3.2.3.    Technology

(174)

Amazon describes itself as a technology company which ‘approaches retail as an engineering problem’ (165). Thus, technology is an important part of Amazon's business. Technology allows Amazon to provide competitive prices, target suggestions for items to particular costumers, process payments, manage inventory and ship products to customers. Technology is also necessary to support the scale of the business, since Amazon's business strategy relies on constant expansion (166).

(175)

Amazon's technology is not static, but is continuously developed and improved. If Amazon did not update and maintain its technology, Amazon would not be able to provide the ‘comprehensive e-tail experience that underpins its commercial success’ (167). In addition to maintaining and improving the existing technology, Amazon's teams develop software that supports new functionalities that are added over the years (168). As stated by Amazon, this is vital to its business since ‘[…] constant software development and innovation is indispensable to prevent Amazon's technology from becoming obsolete and the failure of its business operations’ (169). Amazon strives to be reliable, available, fast and flexible in its operations (170).

(176)

Amazon relies on both software and hardware technology (171). Its software infrastructure is based on a so-called ‘service-oriented architecture’, which is essentially a collection of functions (‘services’) in the software that are able to communicate with each other. The individual services of Amazon's service-oriented architecture work together to provide varying types of retail functionality, both in internal processes and towards costumers (172). This ensures, among others, easier maintenance of the individual software components, and a higher degree of innovation.

(177)

The main components of Amazon's software technology are described below:

(a)

Software platform: the software code developed by Amazon to operate its web sites consists of complex software tools that run the various features of the websites, such as search and navigation, order processing and personalisation. The software tools at the root of the platform form an integrated system that is constantly being improved, reinforced and modified. The main features include operating speed, extent of functions and flexibility in the response to users' needs.

(b)

Appearance of the website: the design creates a unique ‘presentation’ of the website.

(c)

Catalogue software: the catalogue consists of all the information on the products sold by Amazon on its websites. Amazon's catalogue is notable for the extent of the information on products that it can obtain through querying other services, such as availability and pricing data.

(d)

Search and navigation function software: the software tools supporting the search and navigation functions of the websites allow the large quantity of information contained in the product catalogues to be flexibly and logically organised and sorted. The site navigation developers use these tools to organise the data so that they can maximise the likelihood that customers will find what they are looking for.

(e)

Logistics software: the logistics process uses software developed by Amazon to manage the inventory, supply chain, logistics and restocking.

(f)

Order processing software: order processing uses software developed by Amazon to perform certain functions, in particular communication with Amazon order management centres to confirm product availability, validate dispatch, estimate the delivery date, and communicate gift packaging requirements and other customer preferences.

(g)

Customer service software: the customer service representatives use software developed by Amazon to monitor customer orders and respond fully and quickly to the wide variety of these.

(h)

Personalisation functions software: Amazon has developed, and is continuing to develop software tools that enable the Amazon databases to store, organise and retrieve a large amount of data on the preferences and purchase history of individual customers. This function results in a better experience for users and is more likely to generate repeat purchases.

2.3.3.   ADDITIONAL INFORMATION ON LUXOPCO

2.3.3.1.    LuxOpCo's organisational structure

(178)

In its submissions of 18 December 2015 and 15 January 2016, Amazon presented an overview of the organisational structure of LuxOpCo as of the end of 2013, describing the departments of the company.

(179)

LuxOpCo's organisational structure is illustrated by the organigram in Figure 3. The number of employees (FTE (173)) working in each of LuxOpCo's teams are indicated in brackets. For example, the Localisation and Translation Team, which was subsequently transferred to [another Amazon company] and relabelled ‘Software development and translation team’, employed [60-70] FTEs at the end of 2013.

Figure 3

LuxOpCo organigram as per end 2013

[…]

(180)

According to the Luxembourg Staffing Policy, contained in the EU Policies and Procedures Manual (174), all positions with a pan-EU responsibility, i.e. for more than two European countries, have to be based in Luxembourg, in particular the positions above a certain job level. Accordingly, each of the Luxembourg operating entities (LuxOpCo, ASE and AMEU) must have directors employed in Luxembourg and are not allowed to have directors employed elsewhere in Europe or in the U.S. Luxembourg-based employees responsible for retail, operations, associates and headquarter functions, such as legal, finance, accounting, tax, treasury, HR, PR, must be employed by LuxOpCo. ASE employs the Vice President of European Sales and all employees dedicated to the Marketplace, Merchants@ and Enterprise Solutions businesses (e.g. Technical Account Managers, Relationship manager for Enterprise Solutions business). The Relationship Manager for the Enterprise Solutions business is a pan-EU position based in Luxembourg. Technical Account Managers with pan-EU responsibilities are based in Luxembourg, while Technical Account Managers dedicated to merchants in a local country are based in that country.

(181)

The aforementioned policy is reflected in the distribution of positions and job holders among Amazon's European entities, illustrated by the list of Amazon's employees since 1997 (175). Amazon's employees performing the roles of Director or Vice President with pan-EU responsibilities are employed at LuxOpCo […] or at ASE […], while employees holding lower-level jobs or responsible for only one country are employed by the EU Local Affiliates.

2.3.3.2.    Financial information on LuxOpCo

(182)

LuxOpCo's profit and loss accounts and balance sheets as presented in its financial statements for the years 2006-2013 are reproduced in Table 3.

Table 3

LuxOpCo financial information for 2006-2013

(EUR million)

LuxOpCo profit and loss

2006

2007

2008

2009

2010

2011

2012

2013

Turnover

n.a.

n.a.

n.a.

n.a.

n.a.

9 130,1

11 892,9

[13 500 – 14 000 ]

COGS

n.a.

n.a.

n.a.

n.a.

n.a.

7 078,4

9 171,9

[10 000 – 10 500 ]

Net turnover

1 930,1

3 426,7

4 031,6

5 191,1

7 042,1

2 051,7

2 721,0

[3 000 – 3 500 ]

Staff costs

2,2

5,1

7,5

11,4

14,0

23,4

40,7

[60 – 70]

Value adjustments on assets

4,0

14,9

16,1

15,9

31,8

81,8

254,4

[200 – 300]

Other operating income

91,3

128,6

211,7

286,6

451,0

724,6

1 183,1

[1 500 – 2 000 ]

Thereof

Royalty received from ASE

78,6

126,1

196,2

285,6

449,8

694,3

1 072,3

[1 500 – 2 000 ]

Royalty received from AMEU

 

2,5

7,5

0,0

0,0

21,9

95,9

[100 – 200]

Other operating (external) charges

1 979,5

3 546,8

4 188,5

5 416,5

7 418,2

2 647,3

3 726,2

[4 500 – 5 000 ]

Thereof

COGS

 

2 608,4

3 058,4

3 952,6

5 458,1

 

 

 

Royalty paid to LuxSCS

95,2

257,9

341,4

519,3

590,0

491,1

499,4

[500 – 600]

Interest receivable and similar income

10,9

22,7

29,7

19,2

23,8

65,4

131,1

[40 – 50]

Interest payable and similar charges

30,4

16,5

35,5

38,3

33,1

60,5

80,0

[70-80]

 

(19,5)

6,2

(5,7)

(19,1)

(9,3)

4,9

51,1

[30 – 40]

Tax on profit and similar charges

4,6

(1,6)

6,7

4,2

5,5

8,2

2,2

[0 – 10]

Profit (loss) for the financial year

11,6

(3,7)

18,8

10,6

14,4

20,4

(68,3)

[20 – 30]


LuxOpCo balance sheet

2006

2007

2008

2009

2010

2011

2012

2013

Assets

Fixed assets

190

209

275

304

547

915

1 361

[1 500 – 2 000 ]

Intangible fixed assets

0

0

0

0

0

2

121

[100 – 200]

Tangible fixed assets

6

5

1

1

3

5

8

[0-10]

Financial fixed assets

184

203

274

303

544

908

1 232

[1 500 -2 000 ]

Current assets

887

1 171

1 518

2 396

3 255

4 113

4 851

[5 000 -5 500 ]

Inventories

185

227

245

384

591

990

1 350

[1 500 -2 000 ]

Debtors

152

255

266

320

511

798

916

[1 000 – 1 500 ]

Transferable securities

99

112

376

1 049

1 348

1 182

924

[800-900]

Cash at bank, cash in postal cheque account, cheques and cash in hand

451

577

632

644

805

1 143

1 661

[1 500 -2 000 ]

Prepayments

0

0

1

1

5

3

16

[10-20]

Total assets

1 077

1 380

1 794

2 702

3 807

5 031

6 228

[7 000 – 7 500 ]

Liabilities

Capital and reserves

35

41

73

89

117

185

109

[100 – 200]

Non-subordinated debt

1 011

1 302

1 676

2 521

3 553

4 636

5 817

[6 500 – 7 000 ]

Trade creditors

397

597

779

1 136

1 661

2 187

2 910

[3 000 – 3 500 ]

Amounts owed to affiliated companies

550

632

833

1 285

1 712

2 109

2 460

[2 500 -3 000 ]

Tax and social security debts

2

6

5

3

1

116

121

[100-200]

Other creditors and accruals

61

68

59

96

179

224

327

[100-200]

Deferred income

31

37

46

92

137

210

301

[300-400]

Total liabilities

1 077

1 380

1 794

2 702

3 807

5 031

6 228

[7 000 -7 500 ]

(183)

LuxOpCo was responsible for the group's cash management in Europe (176). Amounts owed to affiliated companies include a loan granted by LuxSCS to LuxOpCo pursuant to a Credit Facility Agreement (177). This Credit Facility Agreement was described by Amazon as ‘Back-to-back Activity’ (178). Between 2006 and 2016, LuxOpCo utilised the funds drawn under the Credit Facility for acquisitions (e.g. [acquisition Q, R, S and T]) or to provide a loan or equity increase to its subsidiaries to finance their capital expenditure ([examples of use of loans by LuxOpCo subsidiaries]) (179). The amount owed by LuxOpCo to LuxSCS increased from EUR 387 million in 2006 to EUR [2 000-2 500] million in 2013 (180).

(184)

The details of value adjustments and provisions in respect of current assets are provided in Table 4.

Table 4

Value adjustments and provisions in respect of the current assets of LuxOpCo

(EUR thousand)

 

2006

2007

2008

2009

2010

2011

2012

2013

2014

Value adjustments in respect of the current assets

n.a.

8 043

12 556

15 343

170 176

54 908

80 858

[70 000 – 80 000 ]

[40 000 – 50 000 ]

Thereof:

Inventories

 

 

 

 

12 694

45 664

68 251

[60 000 – 70 000 ]

 

Trade debtors

 

 

 

 

4 382

9 244

12 607

[10 000 – 20 000 ]

 

Provisions for value adjustments:

For inventory

16 525

19 340

25 127

35 482

48 320

91 060

152 543

[200 000 – 300 000 ]

[200 000 – 300 000 ]

Trade debtors – doubtful accounts

6 022

11 019

13 739

9 019

11 739

1 653

16 042

[10 000 – 20 000 ]

[20 000 – 30 000 ]

(185)

Amazon provided a detailed overview of the main components of LuxOpCo's turnover, which is reproduced in Table 5.

Table 5

Components of LuxOpCo's turnover

(EUR million)

 

2006

2007

2008

2009

2010

2011

2012

2013

Net sales proceeds

1 798,9

3 152,7

3 849,4

5 019,6

6 751,5

8 741,0

11 166,3

[12 000 – 12 500 ]

Marketplace

71,0

158,1

216,2

302,5

467,0

721,9

1 105,8

[1 500 – 2 000 ]

Digital

0,0

23,2

28,7

26,6

58,9

146,2

369,5

[500-600]

Fulfillment by Amazon

0,0

0,1

0,4

4,2

53,6

80,5

175,6

[400-500]

Prime subscription

0,0

0,4

5,8

25,8

60,4

77,3

113,2

[100-200]

Transportation costs recharge

74,8

135,1

125,9

124,9

117,8

160,2

208,9

[100 – 200]

Gift packaging

2,9

4,4

4,6

5,4

11,7

14,6

24,4

[20-30]

Ancilliary revenues

30,1

71,7

67,6

96,4

107,9

144,5

148,5

[100-200]

 

1 977,7

3 545,7

4 298,7

5 605,4

7 628,8

10 086,3

13 312,1

[15 000 – 15 500 ]

(186)

Amazon provided a detailed break-down of LuxOpCo's operating expenses, which is reproduced in Table 6.

Table 6

Detailed break-down of LuxOpCo's operating expenses

(EUR million)

LuxOpCo external operating charges

2006

2007

2008

2009

2010

2011

2012

2013

Building costs

1,2

2,4

4,3

3,6

3,9

8,0

8,9

[10-20]

COGS

1 486,6

2 608,4

3 058,4

3 952,6

5 458,1

0,0

0,0

[20-30]

Consulting, legal and other

1,5

4,3

5,6

4,9

8,8

16,2

21,2

[30 - 40]

Employee

2,5

2,4

3,2

3,3

4,7

11,7

25,2

[20-30]

Fulfillment

3,1

6,0

8,1

10,1

15,2

25,2

42,9

[60-70]

Intercompany

267,2

544,3

665,3

870,6

1 127,4

976,3

1 591,3

[2 000 -2 500 ]

Marketing

47,3

63,7

85,6

123,9

155,0

259,5

386,6

[400-500]

Others

0,6

– 0,3

11,3

2,0

– 7,4

– 4,6

– 6,6

– [0 – 10]

Receivables and Credit Card fees

24,7

46,0

47,5

49,0

60,4

57,6

55,9

[60-70]

Royalty

0,0

0,3

2,0

29,9

66,1

0,0

0,5

[0-10]

Transportation

145,0

269,2

297,2

366,6

525,9

794,3

1 065,9

[1 000 -1 500 ]

Total

1 979,5

3 546,8

4 188,5

5 416,5

7 418,2

2 144,1

3 191,8

[4 000 – 4 500 ]

(187)

As regards marketing costs, Amazon provided further break-down of this category of LuxOpCo's expenses which is reproduced in Table 7.

Table 7

Detailed overview of LuxOpCo's marketing expenses

(EUR million)

LuxOpCo marketing costs

2006

2007

2008

2009

2010

2011

2012

2013

Ad placement

0,0

0,9

– 0,1

0,0

0,0

19,7

57,5

[60-70]

Associates

29,7

42,9

57,1

71,0

77,7

101,8

136,1

[100-200]

Coop vendor

– 0,4

0,0

0,0

– 2,3

– 4,5

– 8,9

– 14,4

– [20 – 30]

DVDs Disposal

3,8

0,5

– 0,1

0,0

0,0

0,0

0,0

[0 – 10]

DVDs License fees

0,4

0,2

0,0

0,0

0,0

0,0

0,0

[0 – 10]

DVDs Taxes

 

0,3

0,1

0,0

0,0

0,0

0,0

[0 – 10]

Editorial

1,1

1,1

1,1

1,4

1,2

1,4

2,1

[0-10]

Free sample

 

0,0

0,0

0,0

0,0

0,0

0,0

[0 – 10]

Online adds

 

0,0

0,0

0,1

0,2

2,6

9,4

[20-30]

Promotions

0,1

0,2

0,1

0,2

0,2

10,2

18,6

[10-20]

Research

0,0

0,2

0,5

0,5

0,7

2,3

0,7

[0 – 10]

Sponsored links

12,6

17,2

26,9

52,9

79,5

130,4

176,2

[200-300]

Synd Ad expense

 

0,0

0,0

0,0

0,0

0,0

0,3

[0-10]

Syndicated store

 

0,0

0,0

0,0

0,0

0,0

0,0

[0 – 10]

Others

0,0

0,0

0,0

0,0

0,0

0,0

0,0

[0 – 10]

Total

47,3

63,7

85,6

123,9

155,0

259,5

386,6

[400-500]

(188)

Amazon also provided a break-down of intercompany costs as summarised in Table 8.

Table 8

Break-down of the Intercompany costs

(EUR million)

 

2006

2007

2008

2009

2010

2011

2012

2013

Advertising

0,1

0,1

 

– 0,1

– 0,9

25,8

39,6

[30-40]

Application Development Expense

 

 

 

 

 

 

1,4

[0-10]

Customer Service

10,9

18,5

17,7

22,2

54,7

47,7

74,6

[100-200]

Data Center

14,0

24,4

27,8

27,7

35,1

67,7

107,4

[100-200]

Fulfillment Center

106,6

175,0

188,3

228,1

313,1

576,3

973,0

[1 000 -1 500 ]

Marketing

27,9

50,1

24,2

28,3

 

 

 

 

Operations

0,1

0,0

0,0

0,2

0,2

0,2

0,2

[0 – 10]

Shared services center

 

 

 

 

 

2,0

6,2

[10-20]

Support Service

0,2

– 0,2

31,9

32,1

80,9

107,9

172,3

[200-300]

 

159,8

268,0

289,9

338,4

483,1

827,6

1 374,7

[1 500 – 2 000 ]

2.3.3.3.    The relationship between LuxOpCo and the EU Local Affiliates

(189)

As explained in Recitals 114 and 115, the EU Local Affiliates provide certain intra-group services to LuxOpCo in return for a remuneration covering their Applicable Costs plus a mark-up. Besides some variations in the characteristics in the services to be provided by the EU Local Affiliates and the mark-up applied on the Applicable Costs (181), the Service Agreements are to a large extent identical (182).

(190)

Pursuant to the Service Agreements, the EU Local Affiliates shall, to the extent possible, provide general services for LuxOpCo from time to time as requested by LuxOpCo. Those services must be provided in accordance with service standards and guidelines as provided by LuxOpCo (183). In addition to the general services, the five EU Local Affiliates in France, Germany and the UK provide different services: Amazon.fr SARL (184) and Amazon.de GmbH (185) provide costumer and merchant services as well as support services, Amazon.fr Logistique SAS (186) and Amazon Logistik GmbH (187) provide fulfilment services, and Amazon.co.uk Ltd (188) provides fulfilment services, costumer and merchant services as well as support services. Those services are also provided on the basis of a request from LuxOpCo.

(191)

The EU Local Affiliates act as independent contractors (189) and are responsible for maintaining an organisation of qualified personnel capable of meeting the commercial and technical demands of the services as well as for maintaining the necessary facilities and equipment used in the performance of those services (190). The EU Local Affiliates neither assume responsibility for the sales nor for the inventories (191). As explained in Recitals 108 and 109, LuxOpCo takes the strategic decisions concerning the merchandise and pricing (which are critical to the success of LuxOpCo's business (192)), records the sales and costs associated herewith (see Table 3), and owns and assumes the inventory risks.

(192)

The EU Local Affiliates receive a different mark-up on their Applicable Costs for the services provided. The mark-up is determined in the Services Agreements, exhibit 1, as the Applicable Mark-up (193).

2.3.4.   ADDITIONAL INFORMATION ON LUXSCS

2.3.4.1.    Financial information on LuxSCS

(193)

The balance sheet and profit and loss accounts of LuxSCS for the financial years 2005-2013 are reproduced in Table 9.

Table 9

LuxSCS balance sheet and profit and loss

(EUR thousand)

LuxSCS balance sheet

 

2005

2006

2007

2008

2009

2010

2011

2012

2013

CAPITAL

Subscribed capital

1

4

4

4

4

4

4

4

[0-10]

Share premium

116 204

417 587

417 587

417 587

417 587

417 587

464 363

549 035

[500 000 -600 000 ]

Revaluation reserve

 

 

 

 

 

 

 

690

[400-500]

Profit (loss) brought forward and of the financial year

– 149 362

– 191 242

– 26 127

275 480

684 473

1 125 172

1 426 951

1 544 845

[1 500 000 – 2 000 000 ]

CREDITORS

Amounts owed to affiliated companies

33 185

171 406

25 525

26 292

28 013

37 549

65 931

138 006

[100 000 -200 000 ]

Other creditors and accruals

0

13 540

49

1 095

208

629

327

515

[1 000 -10 000 ]

Total liabilities

28

411 294

417 037

720 457

1 130 285

1 580 941

1 957 577

2 233 094

[2 000 000 -2 500 000 ]

ASSETS

Shares in affiliated undertakings

25

24 184

24 184

24 184

25 909

42 176

104 652

130 152

[100 000 -200 000 ]

Intangible assets (acquired) and goodwill

 

 

 

 

 

 

18 978

116 101

[90 000 -100 000 ]

Amounts owed by affiliated companies

0

387 053

392 810

696 227

1 104 283

1 538 640

1 833 863

1 986 763

[2 000 000 -2 500 000 ]

Other debtors and cash

3

57

42

47

93

125

84

79

[300-400]

Total assets

28

411 294

417 037

720 457

1 130 285

1 580 941

1 957 577

2 233 094

[2 000 000 -2 500 000 ]


(EUR thousand)

LuxSCS Profit and loss

 

2005

2006

2007

2008

2009

2010

2011

2012

2013

INCOME

Other operating income

0

78 598

274 558

390 593

519 316

582 731

491 107

493 317

[500 000 – 600 000 ]

Interest receivable and similar income

681

25 178

27 312

30 035

32 373

28 282

44 064

56 026

[40 000 – 50 000 ]

CHARGES

Other charges and other operating charges

147 259

135 211

132 461

114 338

105 133

166 143

230 355

409 977

[400 000 – 500 000 ]

Value adjustments

 

 

 

 

 

 

1 826

18 557

[20 000 – 30 000 ]

Interest payable and similar charges

524

10 445

4 294

4 683

2 363

4 171

1 211

2 915

[600 – 700]

Profit of the financial year

– 147 101

– 41 881

165 115

301 607

444 193

440 699

301 779

117 894

[100 000 – 200 000 ]

(194)

Table 10 provides a break-down of the ‘Other charges and other operating charges’ incurred by LuxSCS during the relevant period.

Table 10

Other charges and other operating charges incurred by LuxSCS 2006-2013

(EUR thousand)

 

 

2006

2007

2008

2009

2010

2011

2012

2013

Description

Counterparty

 

 

 

 

 

 

 

 

Accounting fees

External

2

3

 

 

 

 

 

 

Bank charges

External

1

2

1

1

1

0

0

[0-10]

Courier charges

External

 

0

 

 

 

 

 

 

Domain licenses

External

 

 

 

 

 

285

 

 

Legal fees - general corporate

External

111

232

537

617

875

 

 

 

Outside Services

External

 

 

 

 

0

 

 

 

Miscellaneous gains/losses

Various

0

0

– 2

0

 

 

 

 

Intercompany - sale of inventory

Amazon.de GmbH

1 468

 

 

 

 

 

 

 

 

LuxOpCo

2 205

 

 

 

 

 

 

 

 

Amazon.co.uk Ltd

522

 

 

 

 

 

 

 

Buy-in payments

Amazon Technologies , & A9.com, & Audible

68 271

42 274

27 209

9 439

39 957

26 803

56 975

[1 000 – 10 000 ]

Cost sharing agreement

Amazon Technologies , & A9.com, & Audible

62 630

89 956

86 593

95 076

12 561

202 286

351 497

[400 000 – 500 000 ]

(195)

As illustrated in Table 10, the external costs incurred by LuxSCS are mainly intra-group charges under the Buy-In Agreement and the CSA. In addition to the Buy-In Payments, as specified in Table 11, and CSA Payments, as specified in Table 12, LuxSCS incurred subsequent buy-in payments due to some acquisitions of third-parties' IP by Amazon US, which subsequently licensed that IP to LuxSCS under the CSA. Those costs, together with the Buy-In Payments and the CSA Payments, are hereinafter referred to as the ‘Buy-In and CSA Costs’. LuxSCS also incurred charges for the intercompany sale of inventory following the 2006 restructuring of Amazon's European operations. Finally, LuxSCS incurred external costs of domain licenses, legal fees, accounting fees and bank charges (194).

(196)

As further illustrated in Table 10, the costs borne by LuxSCS do not include any recharge of costs incurred by LuxOpCo related to the development, enhancement, or management of the Intangibles or recharge of any costs borne by LuxOpCo due to the operation of the EU on-line retail or service business, such as bad debts, inventory write-downs, marketing costs, etc. LuxSCS also did not incur any costs related to remuneration of the sole manager.

2.3.4.2.    Additional information on the Buy-In Agreement and the CSA

(197)

In return for the Intangibles obtained under the Buy-In Agreement, LuxSCS agreed to make annual Buy-In Payments to ATI. LuxSCS made following Buy-In Payments to ATI in the period under review (see Table 11 below) (195):

Table 11

Buy-In Payments

(in millions)

 

2006

2007

2008

2009

2010

2011

Buy-In Payment (in USD)

82,68

54,95

28,26

11,04

2,28

1,08

Buy-In Payment (EUR equivalent)

68,34

42,27

19,15

8,45

2,40

0,79

(198)

In return for the rights to the Intangibles obtained under the CSA, LuxSCS agreed to share certain R & D costs incurred in relation to the Development Program (196), i.e. the ‘Development Costs’ (197) (which also includes ‘Subcontractor's Development Costs’) (198). According to Amazon, those costs encompass expenses associated with the development of products, technology, fulfilment, and marketing intangibles (199), as well as allocated general and administrative costs and expenses for purchase of intellectual property incurred by A9 and ATI (200).

(199)

The share of the Development Costs to be borne by LuxSCS under the CSA was determined by the proportion of Amazon's revenues generated in Europe to the global group's worldwide revenues in the given year (201). For example, in 2012 Amazon generated 28,6 % of its worldwide revenues in Europe. Therefore, 28,6 % of the Intangibles' development costs incurred in 2012 were allocated to LuxSCS (202).

(200)

According to the information in the CSA Annual Summary Reports (203), LuxSCS itself did not directly incur any Development Costs during the relevant period. Instead, LuxSCS only contributed financially to the development of the Intangibles, as covered by the CSA, by way of its annual cost sharing payments. Table 12 shows the financial contributions made by LuxSCS to the cost sharing pool under the CSA (the ‘CSA Payments’) (204).

Table 12

CSA Payments by LuxSCS

(EUR million)

 

2006

2007

2008

2009

2010

2011

2012

2013

Total

CSA Payment by LuxSCS

63

90

87

95

125

202

351

[400-500]

[1 000 -1 500 ]

(201)

The CSA Annual Summary Reports (205) also contain Development Costs incurred by Amazon's development centres, which are spread around the world, including in Europe. Those development centres carry out contract development for A9 and ATI, for which they are remunerated by A9 and ATI at cost + [5-10] % basis (206).

(202)

The CSA was entered into for the life of the Intangibles and could be changed or terminated only by mutual agreement between the parties (207) in the event of a change of control or substantial encumbrance (208) or in the event of one of the parties failing to cure for failure of its performance under the CSA (209). Accordingly, LuxSCS had no possibility to unilaterally terminate the CSA.

(203)

The CSA was amended twice during the relevant period (210). The first amendment, signed in July 2009 and effective as of 5 January 2009, aimed at aligning the agreement to the requirements under the US Treasury Regulation for qualified cost sharing arrangements. As a result, a list of the functions and risks to be undertaken by the parties to the CSA (211) was specified in that agreement (212). This list is reproduced in Table 13.

Table 13

Functions and risks of LuxSCS in connection with the CSA

No.

Functions of LuxSCS

Risks to be assumed by LuxSCS

1

[LuxSCS] shall conduct Development Program either directly or indirectly through its subsidiaries, within the European Territory and share the results of its activities with [A9 and ATI].

All business risks relating to European Territory, including, but not limited to, credit risk, collections risk, market risk, risk of loss, risks relating to maintaining a workforce capable of efficiently and timely selling goods and providing services in the European Territory.

2

[LuxSCS] shall perform sales and marketing activities within the European Tenitory (213).

Risk associated with the Development Program risks, including risk of failure or untimely development of products or provision of services for the European Territory.

3

[LuxSCS] shall perform strategic planning activities on customer needs and product requirements relating to Development Program within its Territory.

Products related market risks within the European Territory and impact on success of Research Program (214) including:

Risks associated with the successful recruitment, retention and motivation of employees;

Timely and accurately predicting market requirements and evolving industry standards;

Accurately defining new products or services;

Timely completing and introducing new product or offering designs.

4

[LuxSCS] shall perform budgeting and planning activity associated with the Development Program.

Legal and regulatory risks associated with operating an on-line business.

5

[LuxSCS] shall manage strategic acquisitions of technologies that fall within the scope of the Development Program.

Brand development and brand recognition risks within the European Territory.

6

[LuxSCS] shall perform quality control and assurance functions.

Key personnel risks, quality control risks and product safety and liability risks (including warranty and liability risks) within the European Territory.

7

[LuxSCS] shall sell select, hire, and supervise employees, contractors and sub-contractors to perform any of the above activities.

Acquisition risks, including the ability to timely and successfully incorporate any acquired technology successfully.

(204)

The second amendment, signed in February 2014 and effective as of 1 January 2014, changed the method to determine the share of the Development Costs to be borne by LuxSCS under the CSA. As a result, LuxSCS's cost share percentage is determined by the proportion of Amazon's gross profit attributable to Europe to the global group's gross profit in a given year.

2.3.4.3.    Other costs incurred by LuxSCS in relation to the Intangibles

(205)

As regards marketing intangibles used by LuxOpCo in Amazon's European retail business, Amazon explained that they ‘included rights to Amazon's local European marketing intangibles and global marketing intangibles. LuxSCS incurred marketing expenses in two ways. First, it either directly or indirectly reimbursed marketing expenses incurred by the European operating companies. Second, the cost sharing payments included an allocation of marketing expenses associated with the development of global marketing intangibles, which LuxSCS had the right to exploit in Europe. With respect to the first set of marketing costs, LuxSCS did not distinguish between expenses that benefitted the global marketing intangibles and those that benefitted only local marketing intangibles, as all such expenses were to be incurred by LuxSCS’ (215).

(206)

However, following a clarification request from the Commission, Amazon clarified that ‘[t]he financial accounts [of LuxSCS] do not contain an item directly reflecting the reimbursement of marketing expenses. Rather […] the reimbursement of marketing expenses occurs through a reductions of the royalty amounts paid to LuxSCS, but such reduction is otherwise not directly identifiable in the financial accounts’ (216).

2.3.4.4.    Information on the US Tax Court proceedings

(207)

In November 2012, the United States tax administration (Internal Revenue Service, ‘IRS’) issued a Statutory Notice of Deficiency (217) to Amazon in the US concerning a deficiency in the United States federal income taxes for Amazon's 2005 and 2006 tax years. In particular, the IRS contested the value at which the pre-existing intangibles were transferred, namely the Buy-In Payments made by LuxSCS to ATI, and the amount of Development Costs paid by LuxSCS under the CSA (218). Subsequently, a litigation procedure between Amazon and the IRS was initiated before the US Tax Court (219). In addition to the trial held before the US Tax Court, the IRS issued summons and took depositions under oath from numerous Amazon employees (220).

(208)

More specifically, in its US income tax returns Amazon reported the Buy-In Payments received from LuxSCS under the Buy-In Agreement to receive the right to use pre-existing IP (the ‘Buy-In’) of around USD 217 million and CSA Payments received from LuxSCS under the CSA of around USD 116 million in 2005 and USD 77 million in 2006. The IRS contested both the amount of the Buy-In Payments and the CSA Payments. Based on an expert report dated 2011, the IRS considered USD 3,6 billion to be the correct amount of Buy-In Payments for the IP. This amount was adjusted to USD 3,468 billion by the IRS in the course of the court proceedings. The IRS expert used the discounted cash-flow method applied to the expected cash flows from the European business to arrive at that value. The assumptions on which that valuation was based deviated significantly from those of Amazon. In particular, the IRS experts considered Amazon's IP to have unlimited useful life, while Amazon considered it short-lived. As regards the CSA Payments, the IRS considered that 100 % of costs captured in the ‘Technology and Content’ cost centre should have been included in the pool of costs to be shared under the CSA.

(209)

On 23 March 2017, the US Tax Court issued its opinion in which it rejected practically all of the IRS's corrections. In particular, the US Tax Court rejected the IRS's valuation and recognized that the useful life of Amazon's Intangibles was limited. The US Tax Court also found that the IRS was not in compliance with the Income Tax Regulations, which require restricting the valuation of the IP to the assets already existing at the time of the Buy-In Agreement and using recognised valuation methods. The US Tax Court accepted Amazon's reasoning that the costs recorded internally under the ‘Technology and Content’ cost centre are not entirely Development Costs. Instead, they are mixed costs, because they also contain a substantial part of costs not related to IP-development activities. In conclusion, the US Tax Court found that the adjustments to the Buy-in and CSA Payments required by the IRS were arbitrary and unreasonable and the methods used by the IRS to determine those adjustments were not appropriate. At the same time, the US Tax Court confirmed, with certain adjustments, Amazon's method of valuing the Buy-in and of attributing of ‘Technology and Content’ costs to the pool of costs to be shared as appropriate (221).

(210)

In the context of determining the correct Buy-In Payments, the US Tax Court observed that Amazon and the IRS agreed that the comparable uncontrolled transaction (CUT) method (222) can be applied and that the M.com Agreement which Amazon concluded with [A] is the most comparable transaction to the licencing of pre-existing Amazon IP from Amazon US to LuxSCS. Nevertheless, the US Tax Court acknowledged that under the [A] Agreement Amazon provided a variety of ancillary services to [A], which Amazon US did not provide to LuxSCS. Furthermore, it observed that the pricing in the agreement was set in a ‘holistic’ manner, without attributing specific remuneration to the provision of each individual service or IP. That was an obstacle to relying on a headline commission rate of the [A] Agreement as a benchmark for the royalty rate for the IP made available by Amazon US to LuxSCS. A detailed economic review of the [A] Agreement was available only for the July 2006 amendment of the [A] Agreement. Due to an incomplete documentary record of the [A] Agreement, the remaining 15 M.com Agreements, together with the underlying detailed economic analysis of the fee structure, if available, were reviewed to arrive at a base royalty rate for the technology of [3-3,5] % on sales. It was further observed that [description of the correlation between commission rate and sales volume] (223), a downward volume adjustment was applied to arrive at a royalty rate for the technology of [3-3,5] %. The royalty rate for the pre-existing Amazon's marketing Intangibles was further estimated to be at [1-1,5] % on the basis of a comparison with four license agreements between third parties unrelated to Amazon. The arm's length Buy-In Payment for the customer information was estimated at USD [100-200] million.

(211)

To better understand the functions of LuxSCS and its subsidiaries in Europe in relation to the development, enhancement, management, and exploitation of the Intangibles, the Commission requested information produced in the context of the US Tax Court proceedings regarding the payments made by LuxSCS under the Buy-In Agreement and the CSA. Amazon submitted all information used and produced for the litigation before the US Tax Court to the Commission.

2.3.4.5.    Buy-in payments for other IP rights acquired by LuxSCS

(212)

During the relevant period, LuxSCS received IP from affiliated companies and third parties at several instances which it, however, never acquired at its own initiative.

(213)

In some instances, a company holding an IP or an IP itself was acquired by Amazon.com, Inc. and the IP was transferred by Amazon.com, Inc. to Amazon Technologies, Inc. Such IP was comprised by the CSA which included all IP transferred or assigned to ATI by a third party (224) and the costs of such acquisitions would be included in the cost pool as buy-in payments (225). As a result, a number of buy-in payments made by LuxSCS for IP are not supported by a specific agreement, but are payments made with reference to the CSA. Examples include buy-in payments for [acquisition U and R] (226) and [acquisition T].

(214)

In other instances, the company holding the IP was acquired by another Amazon entity and its IP then transferred to ATI. This was the case when LuxOpCo acquired the [acquisition Q] group which held IP consisting not only of digital content rights, but also some technology. The technology component of the [acquisition Q] IP was sold to ATI, which then contributed it to the CSA in return for a buy-in payment from LuxSCS.

(215)

Initially, all buy-in payments were included in the expenses of the financial year. In 2011, LuxSCS started capitalising some acquisitions, either by recording them as an intangible asset (e.g. [acquisition Q] (227), [acquisition T] (228) in 2011, [acquisition U] in 2012 (229)) or as fixed asset (e.g. [acquisition V] (230) in 2013) (231).

2.3.4.6.    Written resolutions of LuxSCS's sole manager of and minutes of LuxSCS general meetings

(216)

Amazon confirmed that the Amazon group employees involved in developing and maintaining the Intangibles are neither employed by LuxSCS nor by any entities that participate in LuxSCS (232). To better understand the activities undertaken by LuxSCS, the Commission requested Amazon to provide the written resolutions of the management of LuxSCS as well as minutes from general meetings of LuxSCS. A summary of the written resolutions of the sole manager of LuxSCS (i.e. Amazon Europe Holding, Inc.) and the minutes from general meetings between the partners of LuxSCS during the period 2004-2013 is reproduced in Table 14.

Table 14

Minutes of SCS from 2004 -2013

 

Date

Type of decision

Summary

 

07/06/2004

Written resolution of the sole manager of LuxSCS ([…]as proxyholder)

Approving all necessary actions as regard the post-formation steps; Ratification of the opening of the bank account with [bank]; Approving entering into a domiciliation agreement with [service company]; Incorporation of LuxOpCo.

 

14/01/2005

Written resolution of the sole manager of LuxSCS ([…] as vice President)

Ratification of two cost sharing agreements and a buy-in agreement; Adopting amendments to LuxSCS' articles of association, in order to resolve the adoption of certain specific rights of the shares on dividends and other distributions, and the adoption of specific share premium accounts; Increase of LuxSCS' share capital by way of an all assets and liabilities contribution to be undertaken by ACI Holdings Limited, a Gibraltar company (‘ACI’); Approving the appointment of […] as additional manager of LuxOpCo and an amendment of the corporate object of LuxOpCo; Assigning a note receivable to Amazon.com International Sales, Inc.; Granting a loan to LuxOpCo.

 

17/01/2005

Minutes of extraordinary General Meeting ([…] as president, […] as secretary, […] as scrutineer)

Adoption of new articles of association, in order to resolve the adoption of some specific rights of the shares on dividends and other distributions; Increase of share capital

 

07/06/2005

Written resolution of the sole manager of LuxSCS ([…] as vice President)

Transfer of the registered address of LuxSCS.

 

22/06/2005

Minutes of General Meeting ([…] as president, […] as secretary, […] as scrutineer)

Waiver of notice of rights; Approval of the annual accounts as of 31 December 2004; Discharge of the sole manager, Amazon Europe Holding, Inc. for the financial year ending on 31 December 2004.

 

22/06/2005

Written resolution of the sole manager of LuxSCS ([…] as vice president)

Settlement of LuxSCS's accounts as of 31 December 2004 and resolution to submit such accounts to the LuxSCS's shareholders for approval; Discharge of the sole manager of LuxSCS for the accounting year ending on 31 December 2004.

 

06/02/2006

Written resolution of the sole manager of LuxSCS ([…] acting on behalf)

Adopting an increase of the share capital of LuxSCS by a contribution in kind of shares held by Amazon.com, Inc. in Amazon.fr Holdings SAS having a value of USD 1 017 240 in consideration of limited shares of LuxSCS; Approving the entering into one or more share transfer agreements in order to acquire 100 % off the shares of Amazon.co.uk Ltd and Amazon.de GmbH held by Amazon.com, Inc. and 95,8 % of the shares of Amazon.fr Holdings SAS held by Amazon.com, Inc., in consideration of a promissory note in principal amount of USD 194 672 760,00 ; Adoption of increase of the share capital by way of an all assets and liabilities contribution to be undertaken by ACI Holdings in consideration of limited shares of LuxSCS.

 

06/02/2006

Minutes of the extraordinary General Meeting of LuxSCS ([…] as president, […] as secretary, […] as scrutineer)

Increase of the share capital of LuxSCS; Resolution to accept the subscription and payment by Amazon.com, Inc. of new limited shares by way of a contribution in kind; Increase of the share capital of LuxSCS; Subscription and payment by ACI Holdings Limited of new limited shares by way of a contribution in kind; Cancellation of 900 limited shares in LuxSCS; New composition of the shareholding of LuxSCS.

 

07/02/2006

Written resolution of the sole manager of LuxSCS ([…] acting on behalf)

Approving the entering into share transfer agreement in order to sell 100 % of the shares of Amazon.de GmbH and 8 724 191 of the shares (representing 93,1471 %) of Amazon.co.uk Ltd, in consideration of a note amounting to EUR 136 828 362 ; Proposal to contribute 6,8529 % of the shares of Amazon.co.uk Ltd and 100 % of the shares of amazon.fr Holdings SAS to LuxOpCo,; Granting a loan to LuxOpCo.

 

18/04/2006

Written resolution of the sole manager of LuxSCS ([…] acting on behalf)

Resolution to split into three different promissory notes a promissory note issued by the LuxSCS on February 6, 2006 in the principal amount of USD 194 672 760 to the benefit of Amazon.com. Inc.; Increase the share capital of LuxSCS by a contribution in kind to LuxSCS by ACI of the UK Note and the DE Note in consideration of the issuance of limited shares of LuxSCS.

 

19/04/2006

Minutes of the extraordinary General Meeting of LuxSCS ([…] as president, […] as secretary, […] as scrutineer)

Increase of the share capital of LuxSCS; Resolution to accept subscription and payment by Amazon.com, Inc. of new limited shares by way of contribution in kind; New composition of LuxSCS; Amendment of the articles of association.

 

28/04/2006

Written resolution of the sole manager of LuxSCS ([…] as vice president)

Acknowledgement of the resignation of […]as manager of LuxOpCo and of the appointment of […] and […] as managers of LuxOpCo; Adopting an increase of the share capital of [LuxSCS] by way of an all assets and liabilities contribution to be undertaken by ACI Holdings Limited, a Gibraltar company (‘ACIH’) in consideration of limited shares of LuxSCS; Approving the assignment of certain IP rights from Amazon.co.uk Ltd, Amazon.fr Holdings SAS and Amazon.de GmbH; Approving the acquisition of the EU Retail Business of Amazon.com Int'l Sales, Inc., and the subsequent transfer of the same to LuxOpCo; Approving intellectual property license agreements with LuxOpCo; Merger of certain limited shareholders of LuxSCS; Loan to LuxOpCo.

 

28/04/2006

Minutes of the extraordinary General Meeting of LuxSCS ([…] as president, […] as secretary, […] as scrutineer)

Increase of share capital; Resolution to accept subscription and payment by ACI Holdings Limited of all the 3 750 limited shares; Cancellation of 1 993 shares; New composition of the shareholding of LuxSCS; Amendments of the articles of Association.

 

09/05/2006

Minutes of the General Meeting of LuxSCS ([…] as president, […] as secretary, […] as scrutineer)

Waiver of notice rights; Amendment to the articles of association of LuxSCS further to the merger of Amazon.com Int'l Marketplace, Inc. into Amazon Int'l Sales.

 

27/06/2006

Minutes of the extraordinary General Meeting of LuxSCS ([…] as president, […] as secretary, […] as scrutineer)

Decrease of the personal share premium account of ACI Holdings limited further to the final valuation of the 28 April 2006 contribution.

 

22/05/2007

Written resolution of the shareholders of LuxSCS ([…] as vice President, […] as vice president, […] as treasurer and director)

Settlement of LuxSCS' annual accounts as of 31 December 2005 and resolution to submit the annual accounts to the sole shareholder of LuxSCS and to discharge the sole manager of LuxSCS for the accounting year ending on 31 December 2005.

 

22/05/2007

Written resolution of the shareholders of LuxSCS ([…] as vice President, […] as vice president, […] as vice president, treasurer and director)

Approval of the annual accounts as of 31 December 2005 and allocation of the result; Discharge of the managers for the financial year ending on 31 December 2005.

 

25/04/2008

Written resolution of the sole manager of LuxSCS ([…] as vice president)

Settlement of LuxSCS's annual accounts as of 31 December 2006 and resolution to submit such annual accounts to LuxSCS's shareholders for approval; Resolution to discharge to the sole manager of LuxSCS for the accounting year ending on 31 December 2006.

 

25/04/2008

Written resolution of the shareholders of LuxSCS ([…] as vice President, […] as vice president, […] as vice president, treasurer and director)

Approval of the annual accounts as of 31 December 2006 and allocation of the result and resolution to submit the annual accounts to the shareholders of LuxSCS; Discharge of the sole manager of the manager for the financial year ending on 31 December 2006.

 

18/06/2008

Written resolution of the sole manager of LuxSCS ([…] as vice President)

Approval of the annual accounts as of 31 December 2006 of LuxOpCo and amendment and adoption of its signatory delegation policies; Approval of the annual accounts as of 31 December 2006 of Amazon Eurasia Holdings Sarl (‘AEH’) and amendment and adoption of its signatory delegation policies.

 

23/03/2009

Written resolution of the sole manager of LuxSCS ([…] as vice president)

Resolution to contribute an aggregate amount of EUR 25 000 to AEH in consideration for the issuance of new shares by AEH.

 

25/06/2009

Written resolution of the shareholders of LuxSCS ([…] as vice president, […] as president, […] as vice president, treasurer and director)

Approval of the annual accounts as of 31 December 2008 and allocation of the result; Discharge of the sole manager of the manager for the financial year ending on 31 December 2008.

 

25/06/2009

Written resolution of the sole manager of LuxSCS ([…] as president)

Settlement of LuxSCS's annual accounts as of 31 December 2009 and resolution to submit such annual accounts to LuxSCS's shareholders for approval; Proposal to give discharge to the sole manager of LuxSCS for the accounting year ending on 31 December 2008; Approval of the annual accounts as of 31 December 2008 of LuxOpCo; Approval of the annual accounts as of 31 December 2008 of AEH; Proposal to increase the share capital of AEH by a contribution in cash.

 

06/07/2009

Written resolution of the sole manager of LuxSCS ([…] as president, […] as vice president, […] as vice president, treasurer and director)

Approval of the annual accounts as of 31 December 2008 and allocation of the result; Discharge of the sole manager of the manager for the financial year ending on 31 December 2008.

 

31/08/2009

Written resolution of the sole manager of LuxSCS ([…] as president)

Convening of an extraordinary general meeting of LuxSCS regarding from 1 September 2009 regarding: Waiver of notice rights; Amendment to the articles of association of LuxSCS further to the liquidation of ACI Holdings Limited and the related transfer of its 3 750 limited shares held in LuxSCS to its parent company Amazon.com Int'l Sales, Inc.

 

11/09/2009

Minutes of the General Meeting of LuxSCS ([…] as president, […] as secretary, […] as scrutineer)

Waiver of notice rights; Amendment to the articles of association of LuxSCS further to the liquidation of ACI Holdings Limited and the related transfer of its 3 750 limited shares held in LuxSCS to its parent company Amazon.com Int'l Sales, Inc.

 

07/12/2009

Written resolution of the sole manager of LuxSCS ([…] as president)

Resolution on increase of the share capital of AEH by a contribution in cash.

 

22/12/2009

Written resolution of the shareholders of LuxSCS ([…] as president, […] as vice president, […] as vice president and treasurer)

Approval of the distribution of interim dividends of LuxSCS.

 

22/12/2009

Written resolution of the sole manager of LuxSCS ([…] as president)

Distribution of an interim dividend to the Shareholders of LuxSCS.

 

30/04/2010

Written resolution of the sole manager of LuxSCS ([…] as president)

Approval of LuxOpCO's annual accounts as of 31 December 2009; Approval of AEH's annual accounts as of 31 December 2009.

 

28/05/2010

Written resolution of the sole manager of LuxSCS ([…] as president)

Settlement of LuxSCS' annual accounts as of 31 December 2009 and resolution to submit it to the shareholders of LuxSCS and to discharge the sole manager of LuxSCS for the accounting year ending on 31 December 2009; Acknowledgement of the change of registered office of LuxSCS' shareholders and sole manager.

 

14/06/2010

Written resolution of the shareholders of LuxSCS ([…] as president, […] as vice president, […] as vice president and treasurer)

Approval of the annual accounts as of 31 December 2009 and allocation of the result; Discharge of the sole manager for the financial year ending on 31 December 2009.

 

05/07/2010

Written resolution of the sole manager of LuxSCS ([…] as president)

Ratification of shareholder's advances in cash made by the LuxSCS to AEH; Approval of increase the share capital of AEH by way of a contribution in kind of a receivable.

 

13/12/2010

Written resolution of the sole manager of LuxSCS ([…] as president)

Ratification of shareholder's advances in cash made by the LuxSCS to AEH; Proposal to increase the share capital of AEH by way of a contribution in kind of a receivable; Powers of attorney to […], […] and […] to act on behalf of LuxSCS in this respect.

 

07/04/2011

Written resolution of the shareholders of LuxSCS ([…] as president, […] as vice president)

Approval of the allocation of the EUR equivalent of GBP 41 M to a special reserve of LuxSCS further to the contribution by Amazon.com Int'l Sales, Inc., of 3 115 shares it holds in Video Island Entertainment Ltd

 

07/04/2011

Written resolution of the shareholders of LuxSCS ([…] as president)

Resolution to recommend to the shareholders of LuxSCS the allocation of the EUR equivalent of GBP 41 M to a special reserve of LuxSCS further to the contribution by Amazon.com Int'l Sales, Inc., of 3 115 shares it holds in Video Island Entertainment Ltd; Approval of the contribution by LuxSCS to its wholly owned subsidiary LuxOpCo of 3 115 shares held in video Island Entertainment Limited.

 

23/05/2011

Written resolution of the shareholders of LuxSCS ([…] as president, […] as vice president, […] as vice president and treasurer)

Approval of the annual accounts as of 31 December 2010 and allocation of result; Discharge of the sole manager for the financial year ending on 31 December 2010.

 

23/05/2011

Written resolution of the sole manager of LuxSCS ([…] as president)

Settlement of LuxSCS 's annual accounts as of 31 December 2010 and resolution to submit such annual accounts to the LuxSCS's shareholders for approval; Proposal to give discharge to the sole manager of LuxSCS for the accounting year ending on 31 December 2010.

 

01/07/2011

Written resolution of the sole manager of LuxSCS ([…] as president)

Ratification of a shareholder's advance in cash made by LuxSCS to AEH; Approval, as sole shareholder, of the increase of the share capital of AEH by way of a contribution in kind of a receivable.

 

25/01/2012

Written resolution of the sole manager of LuxSCS ([…] as president)

Acknowledgement of the resignation of Mr […] as manager of LuxOpCo and AEH approval of the granting of discharge; Acknowledgement of the appointment of Mr […] as new manager of LuxOpCo and AEH; Approval of the amendment of the corporate signatory policy of LuxOpCo and AEH; Ratification of the shareholder's advance in cash made by the sole shareholder to LuxSCS; Approval of the increase of the share capital of AEH by way of a contribution in kind of a claim; Ratification of the entering by the LuxSCS into amended and restated credit facility agreement; Ratification of the entering by the LuxSCS into an IP assignment agreement dated March 28, 2011 with [acquisition Q].

 

23/04/2012

Written resolution of the sole manager of LuxSCS ([…] as president)

Settlement of LuxSCS' annual accounts as of 31 December 2011 and discharge of the sole manager of LuxSCS for the accounting year ending on 31 December 2011; Approval as shareholder of LuxOpCo of the annual accounts as of 31 December 2011; Approval as shareholder of AEH of the annual accounts as of 31 December 2011.

 

27/04/2012

Written resolution of the shareholders of LuxSCS ([…] as president, […] as vice president, […] as vice president and treasurer)

Approval of the annual accounts as of 31 December 2011 and allocation of the result; Discharge of the sole manager for the financial year ending on 31 December 2011.

 

27/08/2012

Written resolution of the sole manager of LuxSCS ([…] as president)

Approval of the resignation of Mr […] as manager of LuxOpCo and AEH; Approval of the appointment of Mr […] and Mr […] as new managers of LuxOpCo and AEH and the amendment of the corporate signatory delegation policy of LuxOpCo and AEH; Ratification of the shareholder's advance in cash made by LuxSCS to AEH; Approval of an increase of the share capital of AEH by way of a contribution in kind.

 

12/12/2012

Written resolution of the sole manager of LuxSCS (represented by […] by virtue of a delegation of authority)

Ratification of the appointment of Mr […] as new manager of LuxOpCo and AEH; Approval of the amendment of the corporate signature policy of LuxOpCo and AEH; Approval of the resignation of Mr […] as manager of LuxOpCo and AEH.

 

02/04/2013

Written resolution of the sole manager of LuxSCS (represented by […] by virtue of a delegation of authority)

Settlement of LuxSCS' annual accounts as of 31 December 2012 and discharge of the sole manager of LuxSCS; Approval as shareholder of AEH of the annual accounts as of 31 December 2012; Approval as shareholder of LuxOpCo of the annual accounts as 31 December 2012; Ratification of the entry by LuxSCS into an asset purchase agreement for the acquisition of certain assets from [acquisition W1] and [acquisition W2]; Approval of the entering by LuxSCS into an amendment to an IP assignment agreement with Elkotob.com LLC.

 

08/04/2013

Written resolution of the shareholders of LuxSCS (represented by […] by virtue of a delegation of authority, […] as vice president, […] as vice president and treasurer)

Approval of the annual accounts as of 31 December 2012 and allocation of the result; Discharge of the sole manager for the financial year ending on 31 December 2012.

(217)

As illustrated in Table 14, the written resolutions of the sole manager, and the minutes from general meetings of LuxSCS from its incorporation in 2004 to 2013 indicate that the sole manager and the partners of LuxSCS principally dealt only with topics related to the monitoring of their investments in their capacity as partners in LuxSCS, such as share capital changes, capital contributions, granting of loans to affiliated companies and other financial decisions related to LuxSCS and its subsidiaries. The decisions reflected in the written resolutions and minutes also concerned the appointments of managers in the subsidiaries, their discharge and resignations, amendments of articles of association and approval of the accounts.

(218)

Of the 46 written resolutions and minutes summarised in Table 14 only the following four relate to the Intangibles.

On 14 January 2005, the sole manager of LuxSCS approved and ratified that LuxSCS had already entered into the Buy-In Agreement and two cost sharing agreements (including the CSA) during December 2004 and January 2005.

On 28 April 2006, within the context of the reorganisation of the European retail operations, the sole manager of LuxSCS approved the assignment of the editorial contents, trademarks and domain names from Amazon.co.uk Ltd, Amazon.fr Holding SAS and Amazon.de GmbH to LuxSCS as well as the conclusion of the License Agreement with LuxOpCo. The sole manager was further authorised to execute those agreements.

On 25 January 2012, the sole manager of LuxSCS approved and ratified the IP assignment agreement with [acquisition Q] as entered into by LuxSCS and effective as of 29 March 2011. The sole manager was further authorised to execute the IP assignment agreement.

On 2 April 2013, it was reported that LuxSCS and ATI had entered into an asset purchase agreement dated 1 March 2013 to acquire certain assets from a third party comprising software codes and all related intellectual property rights. The sole manager of LuxSCS ratified the asset purchase agreement and the license to LuxOpCo.

2.3.5.   INFORMATION ON IP LICENSING AGREEMENTS ENTERED INTO BETWEEN AMAZON GROUP ENTITIES AND UNRELATED ENTITIES

2.3.5.1.    The M.com Agreements

(219)

In addition to the M.com Agreements listed in Recital 142, Amazon concluded eleven further M.com Agreements between 2004 and 2006 with Bombay Company, DVF, Bebe, Marks & Spencer, Sears Canada, Hobby Hub, Benefit Cosmetic, Timex.com, Mothercare UK and Devanlay US (233).

(220)

Amazon explained that the M.com partners did not receive access to Amazon's technology as such. Rather, Amazon used its technology to provide IT and e-commerce services to the partners (234). As explained by Amazon, pursuant to the M.com Agreements ‘Amazon agreed to provide e-commerce technologies to allow third parties to operate their own retail websites. The M.com customers, such as [A], received only technology, and did not use or receive rights to the Amazon trademarks, brand names, customer information, or any other Amazon intangible property’ (235). Amazon further explained that instead of pricing each element of Amazon's offer individually, it took a holistic approach to the pricing of the M.com Agreements (236). The M.com Agreements post-dating the contested tax ruling contain provisions specifying that each party only obtains a limited, non-exclusive license to the IP of its partner and only for the purpose of executing the agreement.

(221)

Amazon stressed that there are important differences between the M.com Agreements and the License Agreement between LuxSCS and LuxOpCo, since ‘under the agreement between LuxOpCo and LuxSCS, LuxOpCo received full access to customer data, relating to millions of customers. No such access of data is included in the other M.com agreements. Second, the agreement between LuxSCS and LuxOpCo includes trademarks and domains, which are not included in the other M.com agreements’ (237). Amazon explained that it never licenses out customer data to third parties (238).

(222)

The M.com Agreements referred to in the TP Report are described in more detail in Recitals 223 to 229.

(223)

Under the [A] Agreement, Amazon agreed to create, develop, host and maintain a new [A] website and a [A] Store on the Amazon websites, which were to replace [A]'s existing e-commerce web site. [A] determined the price of the products offered for sale both on the [A] Site and the [A] Store, acting as the seller of record (239). Amazon was responsible for shipping and handling of the packages to final customers and providing customer services. [A] and Amazon did not exchange any ownership or rights to IP, unless expressly listed in the agreement. Rights to use the Amazon IP, as considered as reasonably necessary to perform the obligations of the parties under the contract, were licensed by Amazon to [A] on a non-exclusive, limited, and non-transferable basis (240). Similar licenses to exploit [A] IP were granted by [A] to Amazon (241). As of the launch date, customer information obtained through both website stores was co-owned by the parties. The data gathered by the parties prior to the launch date remained sole property of that party (242).

(224)

Under the agreed remuneration structure, [A] was to pay a set-up fee (USD 15 million) and base fees (ranging from USD 7 million to USD 35 million in 2001-2006). Additionally, [A] was to pay variable fees per unit detailed in Table 15 and further fees referred to as accessorial fees (ranging from USD 0,05 to USD 13,75 per unit sold) in relation to the wrapping and over-size of the items sold. Finally, [A] was to pay Amazon a commission fee in percentage of sales detailed in Table 16.

Table 15

Variable fees paid by [A] (243)

(USD)

Variable unit fees (USD/units)

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Sortable

2,36

2,36

2,10

1,87

1,78

1,78

Conveyable

3,83

3,83

3,57

3,27

3,13

3,13

Non-sortable or non-conveyable

4,83

4,83

4,81

4,48

4,28

4,28

Drop-ship units

0,75

0,75

0,75

0,75

0,75

0,75

[…] Gift Card

Drop-Ship Units

0,75

Gift Card free

Customer Return Processing

Same as variable unit fee for each such […] product returned to Amazon or its affiliates

Vendor Return Processing

1,00

1,00

1,00

1,00

1,00

1,00

Table 16

Sales commissions paid by [A]

(%)

 

Year 1

Year 2

Year 3

Year 4

Year 5

Year 6

Product Sales Commission (other than catalogue-branded […] products)

5,0

5,0

4,5

4,0

4,0

4,0

Additional Apparel Product Sales Commission

2,5

2,5

3,0

3,5

3,5

3,5

Product Sales Commission (catalogue-branded […] products)

2,0

2,5

2,5

2,5

3,0

3,0

(225)

For its part, Amazon was to pay [A] a referral fee for Amazon products displayed for sale on the [A] website. This fee amounted to 5 % on sales in 2001 and 2002, 4,5 % on sales in 2003, and 4 % on sales from 2004 to 2006.

(226)

The [A] Agreement's initial five year term was subsequently extended until 31 August 2011, when Amazon's commercial relationship with [A] ended (244).

(227)

The [G] Agreement covered, inter alia, the development, hosting and maintenance of a co-branded portion of the Amazon website to sell products selected and provided by [G]. After the co-branded store was launched, [G] committed to discontinue the operation of the [G] website and to redirect all the traffic from its website to the co-branded store. Amazon determined the price of the products sold through the co-branded store. It purchased the products from [G] and sold them to the final customers (245). [G] owned all the units stored in Amazon's distributor centres and assumed the risk of losses related to this inventory. [G] and Amazon did not exchange any ownership or rights to IP unless expressly listed in the agreement. IP rights considered as reasonably necessary to perform the obligations of the parties under the contract were licensed by Amazon to [G] and by [G] to Amazon on a non-exclusive non-transferable basis (246). [G] was to pay (247) a set-up fee of USD 19,5 million in the first year, an annual base fee of up to USD 70 million in 2004, a fulfilment fee ranging from USD 1,7 to USD 4,5 per unit and a commission fee, initially of 4 % on sales and gradually increasing to 6 % over the years

(228)

Under the [H] and [B] Agreements, Amazon agreed to create new e-commerce websites (mirror sites) which would replace the existing sites of [H] and [B] respectively. Amazon was responsible for creating, hosting and maintaining the e-commerce website (248). It also committed to ensure that the information available and the performance of the mirror sites would be substantially equivalent to the Amazon website. In return, Amazon received the existing client data of [B] and [H], as well as the possibility to list Amazon products on the mirror sites. Amazon paid referral fees amounting to between 5 % and 6 % of the sales value to the two respective counterparties. [H] and [B] shared all pre-existing customer information with Amazon before the mirror sites were launched (249). As of that date, both parties co-owned the customer information obtained through the mirror sites. The agreements stipulated that each party granted to the other a royalty-free non-exclusive, non-transferable license to use their IP identified as necessary to perform the obligations under the agreement (250).

(229)

Under the [I] Agreement, Amazon did not provide an e-commerce platform for [I], but agreed that [I] products would be listed for sale and integrated into the search and browse features of the Amazon website. [I] was to pay a remuneration of 8 % to 9 % of sales generated via the Amazon website.

2.3.5.2.    Other IP license agreements between the Amazon group and non-related entities

(230)

Amazon submitted all IP license agreements concluded with third parties since 2000. None of those agreements concerned a transfer of IP comparable to that in the License Agreement. The agreements submitted do not cover any transfer of the Amazon trademark, e-platform technology or customer database. They concern either the licensing of a registered patent or the digital content.

(231)

In Amazon's opinion, these contracts ‘do not have any relevance to the State aid assessment of the 2003 ATC: [a)] These agreements could only be used for a CUP analysis, while the 2003 ATC rightfully based its analysis on the residual profit split. [b)] In any event, most of the agreements concluded in the period of application of the 2003 ATC (2006 to mid-2014) do not include all of the IP components comparable to the IP included in the license agreement between LuxSCS and LuxOpCo (‘Intangibles’). [c)] Moreover the only agreements with some similarities to the agreement between LuxOpCo and LuxSCS postdate the issuance of the 2003 ATC, which renders them meaningless for the State aid assessment of the 2003 ATC because they could not have been relied upon to conduct the transfer pricing analysis at the time’ (251).

2.3.6.   DESCRIPTION OF AMAZON'S NEW CORPORATE AND TAX STRUCTURE IN LUXEMBOURG AS CONFIRMED BY THE 2014 TAX RULING

(232)

In May 2014, Amazon received a new tax ruling from the Luxembourg tax administration concerning changes made to its corporate and tax structure in Luxembourg. Under the new corporate structure, the role of LuxSCS […]. The principal change to that structure was the creation of a new […] company […], which was inserted in the existing structure between […].

(233)

Under the new corporate structure, the pre-existing platform organisation in LuxOpCo[…] (252). As a result, [60-70] employees previously working in the Localisation and Translation Team of LuxOpCo were integrated in the Software Development and Translation Team […] (253). As regards the License Agreement, […] now pays a royalty to LuxSCS (254) in return for the right to use the Intangibles for the purpose of operating an e-commerce platform in Europe (255).

(234)

[…]'s main activity is […]. The main service […] provides is […]. […] also manages […]. Finally, […] provides […] and is responsible for […]. […] will in turn receive […] (256), […] (257) and […] fees (258) from […].

(235)

In the request for a tax ruling of 14 May 2014, the listing fee to be due from LuxOpCo was considered very low as compared to the average listing fee charged to third party merchants (259). The following reasons were brought forward to justify why […] was willing to grant a discount on the listing fee to LuxOpCo:

(1)

The lower listing fee ‘reflects the […] financial situation and outlook [description of the state of the Retail business market and Amazon's strategy]’ (260).

(2)

[Description of Amazon's commercial strategy]. If […] were to charge a listing fee of [4-6] % to cover its costs of providing the platform service [Amazon projections], both of which would be detrimental to […]. On the other hand, the discount […] will be required to grant will be limited by […]. Given that the allocation of technology and platform expenses is about [4-6] percent of LuxOpCo's projected retail revenues in 2014 it is […]. Thus, a listing fee that is less than [4-6] percent would appear to be a better alternative for LuxOpCo than LuxOpCo investing in the technology and platform itself (261).

(236)

Under the new corporate structure, the role of ASE remains unchanged. It will continue to operate and manage the European Marketplace business. Instead of paying a royalty to LuxOpCo for the totality of sub-licensed Intangibles, it now pays a […] fee […].

(237)

The role of the EU Local Affiliates also remained unchanged the under new corporate structure.

2.4.   DESCRIPTION OF THE RELEVANT NATIONAL LEGAL FRAMEWORK

(238)

The ordinary rules of corporate taxation in Luxembourg are to be found in the Luxembourg Corporate Income Tax Code (loi modifiée du 4 décembre 1967 concernant l'impôt sur le revenue, the ‘LIR’).

(239)

Article 18(1) LIR provides the method to establish a corporate taxpayer's annual profit: ‘The profit is determined as the difference between net assets as of the end and net assets as of the beginning of the reporting period, increased by the withdrawals of business cash or other assets by the taxpayer for its personal use or any other uses which are not intended in the interests of the company and decreased by additional contributions performed during the reporting period’.

(240)

Article 159 LIR provides that resident tax companies are subject to tax on the totality of their profits (262). Article 160 LIR provides that non-resident companies are subject to tax on their source income (263), which is defined in Article 156 LIR (264). Since 2011, all companies subject to tax in Luxembourg are taxed on their taxable profit at the standard tax rate of 28,80 % (265).

(241)

Prior to the entry into force of Article 56bis LIR in January 2017, Article 164(3) LIR was considered to enshrine the arm's length principle in Luxembourg tax law. Article 164(3) LIR provides: ‘Taxable income comprises hidden profit distributions. A hidden profit distribution arises in particular when a shareholder, a stockholder or an interested party receives either directly or indirectly benefits from a company or an association which he normally would not have received if he had not been a shareholder, a stockholder or an interested party’ (266). According to the prevailing interpretation of Article 164(3) LIR, which has been in place since 1967, transactions between intra-group companies should be remunerated as if they were agreed to by independent companies negotiating under comparable circumstances at arm's length. This was confirmed by the explanation provided by Luxembourg in paragraph 64 of its comments to the Opening Decision: ‘The arm's length principle for corporate tax payers established in the Grand Duchy of Luxembourg is set out in Articles 164(3) and 18 of the amended Act of 4 December 1967 on income tax (Loi concernant l'impôt sur le revenue – ‘LIR’) although the term ‘arm's length principle’ is not expressly used in those articles. However, it is definitely that principle that forms the basis of those provisions’. Luxembourg further explained that neither Article 18 nor Article 164(3) LIR differentiates between international and national transactions or between multinational or domestic groups. It follows therefrom that the Luxembourg transfer pricing rules and practices reflect the OECD TP Guidelines, even if Article 164(3) LIR doesn't make any reference to those guidelines (267).

(242)

This longstanding interpretation of Article 164(3) LIR was codified by the Luxembourg Tax Administration in several Circular Letters, in particular LIR no. 164/2 of 28 January 2011 and no. 164/2bis of 8 April 2011 (‘the Circulars’), which concern the application of the arm's length principle to intra-group financing transactions. In addition to the specific guidance on the application of the arm's length principle for such transactions, the Circulars contained a general description of the arm's length principle as set out in the OECD TP Guidelines, which it transposed into domestic law. More specifically, the Circulars gave the following general guidance on the provision of intra-group services: ‘An intra-group service […] has been rendered if, in comparable circumstances, an independent enterprise had been willing to pay another independent enterprise to carry out that activity, or if it had carried out that activity itself’ (268). The Circular further specified that, as a general rule, a tax ruling is usually valid for a maximum of five years, unless the facts and circumstances change or unless the legal provisions on which the ruling was based are modified or if one of the key characteristics of the transaction is altered.

(243)

As of 1 January 2017, a new article 56bis LIR explicitly formalises the application of the arm's length principle under Luxembourg tax law. With the effect of the same date, the above mentioned Circulars were replaced by the Circulaire du directeur des contributions LIR no 56/1 – 56bis/1 du 27 décembre 2016.

2.5.   GUIDANCE ON TRANSFER PRICING

2.5.1.   THE OECD FRAMEWORK ON TRANSFER PRICING

(244)

The Organisation for Economic Cooperation and Development (‘OECD’) has produced several non-binding guidance documents on international taxation. Given their non-binding nature, the tax administrations of OECD member countries, of which Luxembourg is one (269), are simply encouraged to follow the OECD's framework (270). Nevertheless, the OECD's framework serves as a focal point and exerts a clear influence on the tax practices of OECD member (and even non-member) countries. Moreover, in numerous OECD member countries guidance documents forming part of that framework have been given the force of law or serve as a reference for the purpose of interpreting domestic tax law. Therefore, to the extent the Commission refers to the OECD framework in this Decision, it does so because that framework is the result of expert discussions in the context of the OECD and elaborates on techniques aimed to address common challenges in international taxation.

2.5.2.   THE ARM'S LENGTH PRINCIPLE FOR INTERNATIONAL TAX PURPOSES

(245)

When independent companies transact with each other on the market, the conditions of that transaction, including the prices of the goods transferred or the services provided, are normally determined by external market forces. When companies integrated in a multinational corporate group transact with companies from the same group (‘associated group companies’), their commercial and financial relations may not be determined by external market forces, but may, in some cases, be influenced by a common interest to minimise the tax liabilities of the group.

(246)

The OECD' Model Tax Convention on Income and on Capital (‘OECD Model Tax Convention’) (271), which forms the basis of many bilateral tax treaties involving OECD member countries and an increasing number of non-member countries, contains provisions on the appropriate profit attribution between companies within a multinational corporate group. In this respect, Article 9(1) of the OECD Model Tax Convention provides: ‘[Where] conditions are made or imposed between the two [associated] enterprises in their commercial or financial relations which differ from those which would be made between independent enterprises, then any profits which would, but for those conditions, have accrued to one of the enterprises, but, by reason of those conditions, have not so accrued, may be included in the profits of that enterprise and taxed accordingly’. That provision is considered to constitute the authoritative statement in relation to the ‘arm's length principle’ for international tax purposes.

(247)

According to the arm's length principle, national tax administrations should only accept the transfer prices (272) agreed between associated group companies for intra-group transactions if those prices reflect what would have been agreed in uncontrolled transactions, i.e. transactions between independent companies negotiating under comparable circumstances at arm's length on the market. As explained in the OECD TP Guidelines: ‘[t]he arm's length principle is sound in theory since it provides the closest approximation of the workings of the open market in cases where goods and services are transferred between associated enterprises. While it may not always be straightforward to apply in practice, it does generally produce appropriate levels of income between members of MNE [multinational enterprise] groups, acceptable to tax administrations. This reflects the economic realities of the controlled taxpayer's particular facts and circumstances and adopts as a benchmark the normal operation of the market’ (273). This is the essence of the arm's length principle. Therefore, OECD member countries have agreed that, for tax purposes, the profits of associated companies may be adjusted as necessary to ensure that the arm's length principle is complied with. In other words, the OECD member countries consider that an adjustment of transfer prices is appropriate when the conditions of the commercial and financial relations in an intra-group transaction differ from those they would expect to find in comparable uncontrolled transactions.

(248)

By seeking to adjust profits by reference to the commercial or financial conditions which would have been obtained in comparable uncontrolled transactions, the arm's length principle ensures the preferred approach of the OECD of treating the members of a corporate group for tax purposes as operating as separate entities (the ‘separate entity approach’), rather than as inseparable parts of a single unified business (274).

(249)

The OECD provides guidance to tax administrations and multinational enterprises on the application of the arm's length principle in its transfer pricing guidelines, of which the latest amendments were published in 2017 (the ‘2017 OECD TP Guidelines’) (275). Earlier versions of the guidelines were approved by the OECD Council on 22 July 2010 (‘2010 OECD TP Guidelines’) (276) and on 13 July 1995 (‘1995 OECD TP Guidelines’) (277). The latest revisions and clarifications to the OECD TP Guidelines, as set out in 2017 OECD TP Guidelines, are, among others (278), based on the OECD's final report on Actions 8-10, Aligning Transfer Pricing Outcomes with Value Creation (‘BEPS Actions 8-10 Final Report’) (279), as published under its Action Plan on Base Erosion and Profit Shifting (the ‘BEPS project’). The BEPS Actions 8-10 Final Report contains revisions and clarifications on the OECD TP Guidelines in general and in relation to intangibles (280) and cost sharing agreements (281) in particular.

2.5.3.   THE OECD TRANSFER PRICING METHODS

(250)

The OECD TP Guidelines describe five methods to determine an arm's length price of intra-group transactions: (i) the CUP method; (ii) the cost plus method; (iii) the resale minus method; (iv) the transactional net margin method (the ‘TNMM’), and (v) the transactional profit split method. In general, the most appropriate transfer pricing method must be applied with reference to the circumstances of the case (282). However, for difficult cases, where no one approach is conclusive, a flexible approach would allow the evidence of more than one method to be used in conjunction (283). Multinational corporate groups retain the freedom to apply methods not described in those guidelines to establish transfer prices, provided those prices satisfy the arm's length principle (284).

(251)

A distinction is drawn between traditional transaction methods (the first three methods) and transactional profit methods (the last two methods) (285). The traditional transaction methods are regarded as the most direct means of establishing whether the commercial or financial conditions in a transaction between associated companies are at arm's length. On this basis, the OECD TP Guidelines declare an express preference for the traditional transaction methods, such as the CUP method, over the transactional methods, i.e. the TNMM and the profit split method (286).

(252)

The CUP method, the TNMM and the profit split method are relevant for the present Decision and are therefore described in more detail in Recitals 253 to 256.

(253)

The CUP method is referred to as a direct transfer pricing method (287). It compares the price and the other conditions agreed for the transfer of goods or services in an intra-group transaction to the price and the other conditions agreed for the transfer of goods or services in comparable uncontrolled transactions (i.e. transactions between unaffiliated companies) conducted under comparable circumstances (288).

(254)

The TNMM and the profit split method are often described as ‘indirect methods’. Those methods price intra-group transactions by determining what would be an arm's length net profit (i.e. operating profit) for a particular activity by estimating the net profit which a non-integrated company engaging in the same or similar activity would be expected to make on that activity (289).

(255)

The TNMM examines the ratio of the net profit (290) to an appropriate base (e.g. costs, sales, assets) (291), which is referred to as a ‘net profit indicator’ or ‘profit level indicator’ and related to the intra-group transaction (or transactions that are appropriate to aggregate) under review. The net profit indicator should be established by reference to the net profit indicator that independent parties earn in comparable uncontrolled transactions. When applying the TNMM, it is necessary to choose the tested party to the controlled transaction, i.e. the party to the transaction which is tested with a profit level indicator. That choice must be consistent with the functional analysis performed (including risk assumed and assets used) of both parties to the intra-group transaction(s) under review. In applying the TNMM, the tested party is, as a general rule, the party to which the method can be applied in the most reliable manner and for which the most reliable comparables can be found. The use of the TNMM is often associated with paragraph 3.18 of the 2010 OECD TP Guidelines, according to which the ‘tested party’ should, in principle, be the company which has the less complex function in relation to the intra-group transaction under review (292). Accordingly, the TNMM is considered a well-suited method to test the arm's length remuneration of the party that does not make any unique and valuable contributions to the intra-group transaction(s) under review (293).

(256)

The profit split method is the other ‘indirect method’ to approximate the arm's length prices of intra-group transactions. That method identifies the combined profit (or loss) to be split between the associated companies party to the intra-group transactions being priced and then splits those profits between them on an economically valid basis that approximates the division of profits that would have been anticipated and reflected in an agreement made at arm's length (294). The OECD Guidelines describe two approaches to divide the combined profits among the associated companies: the contribution analysis and the residual analysis. The contribution analysis splits the combined profits on the basis of the relative value of the functions performed (taking account assets used and risks assumed) by each of the parties involved in the intra-group transactions being priced. The residual analysis uses a two-step approach to divide the profits. In a first step, each company is allocated a basic (or routine) profit appropriate for the functions it performs, assets it uses and risks it assumes based on a comparison of the market returns achieved for similar transactions by independent enterprises. In other words, the first step essentially corresponds to the application of the TNMM. In a second step, the residual profit remaining after the first step has been concluded is allocated among the parties in a manner that approximates how independent parties would have divided that profit at arm's length. The profit split method is usually considered an appropriate method where both parties to the intra-group transaction make unique and valuable contributions to that transaction, because in such a case independent parties would be expected to share the profits of the transaction in proportion to their respective contributions (295).

2.5.3.1.    The arm's length range

(257)

The OECD TP Guidelines describe as an acceptable arm's length outcome from a comparison analysis a range of outcomes rather than one specific outcome (296). In practice, what is referred to as a ‘range’ is the interquartile range (297).

(258)

However, the OECD TP Guidelines stress that this is possible only where the range comprises results of relatively equal and high reliability, while in presence of comparability defects, it can be appropriate to use measures of central tendency (for instance the median, the mean or weighted averages, etc.) to determine the most appropriate point in the range (298).

2.5.3.2.    Special considerations on the application of the arm's length principle for intangible property

(259)

Chapter VI of the OECD TP Guidelines provides specific guidance on the application of the arm's length principle to intangible property. Chapter VI was introduced in the 1995 OECD TP Guidelines and was most recently updated in the 2017 OECD TP Guidelines on basis of the BEPS Actions 8-10 Final Report (299).

(260)

According to that Chapter, the application of the arm's length principle to an intangible property must consider both the perspective of the transferor and the transferee of the property. From the perspective of the transferor, the price at which a comparable independent enterprise would be willing to transfer the property under comparable circumstances should be examined. From the perspective of the transferee, it should be examined whether a comparable independent enterprise would be willing to pay such a price (300).

(261)

An independent transferee would only accept to pay the price in question if there are reasonable expectations to secure satisfactory benefits from the use of the intangible property, after considering other options realistically available. Identifying the entity or entities involved in intra-group transactions concerning intangible property which are entitled to retain (partly or entirely) the profits derived from that property is crucial to achieve an arm's length outcome. However, the legal ownership of the intangible property is not determinative when analysing the arm's length nature of the remuneration (301).

2.5.3.3.    Special considerations on the application of the arm's length principle to shareholder activities and low value adding intra-group services

(262)

Chapter VII of the OECD TP Guidelines provides specific guidance on the application of the arm's length principle to intra-group services. Chapter VII was introduced in the 1995 OECD TP Guidelines and most recently updated in the 2017 OECD TP Guidelines on basis of the BEPS Actions 8-10 Final Report (302).

(263)

A multinational group may arrange for certain intra-group services to be available to the members of the group, for example financial or administrative services. Such services might be carried out by the parent company or another group member which may initially bear the cost of providing them. Where intra-group services are deemed to have been provided, it is necessary to determine whether the remuneration to be paid by the receiving company for such services, if any, is in accordance with the arm's length principle (303). As explained in the OECD TP Guidelines, ‘[i]n trying to determine the arm's length price in relation to intra-group services, the matter should be considered both from the perspective of the service provider and from the perspective of the recipient of the service. In this respect, relevant considerations include the value of the service to the recipient and how much a comparable independent enterprise would be prepared to pay for that service in comparable circumstances, as well as the costs to the service provider’ (304).

(264)

However, not all intra-group activities justify a remuneration to be paid by the recipient. An intra-group activity performed by a company in its capacity as shareholder and solely because of that company's ownership interest in one or more other group members (a ‘shareholder activity’) should not be charged to the subsidiaries (305).

(265)

The EU Joint Transfer Pricing Forum (‘JTPF’) is an expert group formed by the Commission in October 2002 which assists and advises the Commission on transfer pricing matters. The JTPF is composed of governmental and non-governmental sector experts in the field of transfer pricing. In February 2010, a report was published on the JTPF's evaluation of the application of the arm's length principle, as set out in the OECD TP Guidelines, on a specific category of services provided between associated companies, described as ‘low value adding intra-group services’ (the ‘2010 JTPF Report’) (306).

(266)

As explained in Annex 1 to the 2010 JTPF Report, low value adding services may, among others, include legal services and accounting services. Where such low value adding services are deemed to have been provided, the 2010 JTPF Report considers the CUP method to be the most appropriate method to determine the arm's length price of those services. However, in the absence of suitable comparable uncontrolled transactions, a cost-based transfer pricing method is the most commonly observed method for determining the arm's length price of such services (307).

(267)

When applying a cost-based method, the appropriate cost base of a particular service needs to be identified. It should then be considered what mark-up, if any, should be applied on those costs. In this respect, the 2010 JTPF Report refers in the first place to paragraphs 7.33 and 7.36 of the 1995 OECD TP Guidelines, stating that a mark-up should not always be applied to the cost base (308).

(268)

The 2010 JTPF Report further found that, based on the experience of the national tax administrations, an appropriate mark-up for low value adding services would typically fall within a range of 3 % to 10 %, and often around 5 %. However, where the facts and circumstances of the specific transaction support a different mark-up, that should be taken into consideration.

2.6.   DESCRIPTION OF THE MAIN ACCOUNTING AND FINANCIAL TERMS USED IN THE DECISION

(269)

A brief overview of financial indicators and accounting concepts frequently used in this Decision is given below.

(270)

A typical profit and loss account first records the income that a company receives from its normal business activities, usually from the sale of goods and services to customers. This accounting item is referred to as ‘Sales’ or ‘Turnover’ or ‘Revenue’.

(271)

Cost of goods sold (‘COGS’) represents mainly the value of material used for the production of goods (raw materials) or the purchase price of goods that have been resold if the company does not process the goods sold. COGS is deducted from sales to calculate gross profit.

(272)

Operating expenses cover principally salary expenses (309), energy expenses, and other administrative and sales expenses. In the case of LuxOpCo, the royalty paid to LuxSCS is classified as ‘other operating charges’, but it is excluded from the operating expenses used to calculate the operating profit according to the contested tax ruling (310).

(273)

Table 17 provides a simplified overview of a profit and loss account (311).

Table 17

Simplified profit and loss account

Sales (or Turnover or Revenue)

Cost of goods sold (COGS)

Gross Profit

Operating Expense (OpEx)

Operating profit (EBITDA)

Earnings before interest and taxes (EBIT) or operating income

Interest and and exceptional or extraordinary income

Taxable income

Tax

Net profit

(274)

Performance and profitability is often measured using ratios presented as ‘margins’ or ‘mark-ups’. Margins are also used in peer comparisons in transfer pricing.

(275)

In transfer pricing, gross margins can be calculated as gross profit divided by sales (or COGS), and net margins as the operating profit divided by sales (or total costs, i.e. sum of COGS and Operating Expenses), in particular when the transactional net margin method is used. Therefore, when using the ‘net margin’ method the numerator of the profit level indicator would be the operating profit.

3.   GROUNDS FOR INITIATING THE PROCEDURE

(276)

In its Opening Decision (312), the Commission explained that it harboured serious doubts as to the compatibility of the contested tax ruling with the internal market. In particular, it expressed several doubts that the transfer pricing arrangement endorsed by the contested tax ruling resulted in an arm's length royalty payment to LuxSCS and an arm's length remuneration for LuxOpCo.

(277)

First, the Commission criticised the fact that the contested tax ruling appeared to have been granted in the absence of a transfer pricing report. It further observed that the ruling had been granted within eleven working days from the receipt of the first letter constituting the ruling request.

(278)

Second, the Commission criticised the fact that the transfer pricing arrangement endorsed in the contested tax ruling did not seem to be based on any of the generally accepted transfer pricing methods set out in the OECD TP Guidelines.

(279)

Third, the Commission criticised the fact that, contrary to recommendations contained in paragraph 6.16 of the 1995 and 2010 OECD TP Guidelines, the royalty payment approved by the contested tax ruling was not related to output, sales or profit. Instead, the royalty was calculated as the residual profit from LuxOpCo's intra-group transactions, which was determined by deducting a routine return attributable to LuxOpCo's functions from LuxOpCo's actually recorded profit.

(280)

Fourth, the Commission questioned whether it was correct to consider LuxOpCo as performing less complex functions when compared to LuxSCS. Based on the description of functions performed by LuxOpCo and the risks assumed by it, those functions and risks appeared to be more complex than those performed by LuxSCS. The specific functions related to the Intangibles, for which LuxSCS is allegedly remunerated, were not described in the ruling request, nor by the Luxembourg tax administration in the contested tax ruling. Furthermore, although LuxSCS was said to retain all risks associated with the ownership of that IP in the ruling request, the risks to be assumed by LuxSCS while holding the Intangibles were not specified, in particular as compared to the entrepreneurial risks assumed by LuxOpCo.

(281)

Fifth, at a [4-6] % mark-up on operating expenses, the Commission considered the remuneration endorsed by the contested tax ruling for the functions performed by LuxOpCo to be relatively low, in particular bearing in mind that, among others, the functions of LuxOpCo were presented as central and strategic commercial decision-making, concentrating the business risk of the entire European market. In addition, the application of a floor and a cap (313) to determine LuxOpCo's arm's length remuneration, which effectively overrides the transfer pricing arrangement based on operating expenses, was not explained. Finally, the Commission questioned whether the choice of an indirect transfer pricing method to determine LuxOpCo's remuneration was justified.

(282)

Sixth, the Commission observed that while the contested tax ruling was granted in 2003, it appeared to be still in force in 2014. The Commission expressed doubts whether it was correct to consider the remuneration accepted in the ruling to still be at arm's length more than 10 years later without any review or obligation to notify the administration, should any critical circumstances have changed in the meantime.

(283)

In light of these criticisms, the Commission came to the provisional conclusion that the contested tax ruling conferred a selective advantage on Amazon in that it resulted in a royalty payment for LuxSCS and a remuneration for LuxOpCo that deviated from an arm's length outcome. Since all the other conditions of Article 107(1) of the Treaty appeared to have been fulfilled and there was no apparent compatibility basis pursuant to Article 107(2) or (3) of the Treaty, the Commission came to the provisional conclusion that the contested tax ruling constituted State aid incompatible with the internal market.

4.   COMMENTS FROM LUXEMBOURG

(284)

Luxembourg's comments to the Opening Decision focus, first, on alleged procedural shortcomings of the Commission's preliminary investigation, second, on alleged legal errors in the Opening Decision and, third, on the doubts expressed by the Commission in the Opening Decision.

4.1.   LUXEMBOURG'S COMMENTS ON ALLEGED PROCEDURAL SHORTCOMINGS

(285)

Luxembourg alleged that the Opening Decision was adopted in an extremely short period of time and on the basis of insufficient information. Luxembourg considered the Commission not to have exhausted its possibilities to gather the necessary information to assess the measure during the preliminary investigation.

(286)

First, Luxembourg argued that the Commission infringed the principles of sincere cooperation and impartiality, in particular by not responding to its offers to meet so as to allow Luxembourg to discuss the information provided before it took the decision to initiate the formal investigation procedure.

(287)

Second, Luxembourg alleged that the Commission had not applied either the letter or the spirit of Article 12(2) of the Regulation (EU) 2015/1589 (314), which stipulates that if the Commission finds the reply to its information requests inadequate or incomplete, it should repeat its request or even issue an information injunction.

(288)

Luxembourg also referred to Articles 5(2) and 12(3) of Regulation (EU) 2015/1589. It observed that, in the present case, no reminder or information injunction was sent to Luxembourg.

4.2.   LUXEMBOURG'S COMMENTS ON ALLEGED LEGAL ERRORS IN THE OPENING DECISION

(289)

Luxembourg considered the Opening Decision to be vitiated by a number of legal errors.

(290)

First, Luxembourg considered that decision to constitute an interference of its sovereign powers in the area of direct taxation. In particular, it considered the Commission to have exceeded its powers in the field of State aid by developing and imposing its own interpretation of the arm's length principle. In this manner, the Commission is seeking to latently harmonise direct taxation rules in breach of Articles 113 and 115 of the Treaty, since the Union can only harmonise substantive law on taxation through unanimously adopted legislative measures.

(291)

Luxembourg drew particular attention to the specific nature and complexity of transfer pricing. According to the OECD TP Guidelines, the national tax authorities need certain discretion to be able to interpret the tax rules in the context of an individual case and decide whether the transfer pricing methodology used results in an acceptable transfer price. Luxembourg claimed that for national tax authorities to ensure legal certainty through tax rulings they need the necessary discretion without being immediately threatened that their judgement will subsequently be declared contrary to the State aid rules. Luxembourg argued that it had received confirmation that its tax ruling practice is appropriate and complies with the Code of Conduct for Business Taxation (315) and with the OECD TP Guidelines (316).

(292)

Second, Luxembourg argued that the precedents relied upon by the Commission in the Opening Decision differ from the contested tax ruling in that they concerned schemes which contained elements leading to an advantage irrespective of the individual circumstances of taxpayers. The advantages offered under those schemes were accessible only to a certain group of companies, whereas the contested tax ruling does not concern the whole tax system, but its application to the individual case of Amazon.

(293)

Third, Luxembourg alleged that the Opening Decision lacks a selectivity analysis and, more specifically, it does not identify the reference tax system or the reference group of taxpayers with regard to which Amazon's tax treatment should be compared. Consequently, no derogation from the reference tax system applied to Amazon and advantage was identified.

(294)

With regard to the correct reference framework, Luxembourg considered it to be the national tax law, and in particular Articles 164(3) and 18 LIR. Although no specific reference is made in Article 164(3) LIR to the OECD TP Guidelines, Luxembourg transfer pricing rules and practices reflect those guidelines. Luxembourg considered that national transfer pricing rules serve to ensure that corporate groups and independent enterprises are treated in the same way. It also pointed out that neither Article 18 nor Article 164(3) LIR differentiates between international and national transactions or between multinational and domestic groups. Luxembourg insisted that the contested tax ruling has to be assessed in the light of the relevant regulatory framework in place and the economic context prevailing at the moment of granting the measure, i.e. in 2003 (317). Luxembourg noted that in 2003 the 2010 OECD TP Guidelines did not exist and no reference was made in Luxembourg law to the 1995 OECD TP Guidelines.

(295)

Fourth, Luxembourg considered that the Commission has not identified any category of undertakings that might have benefited from the measure. Referring to the Autogrill case (318), Luxembourg stated that to establish selectivity a category of undertakings, which are the only ones benefiting from the measure in question, must be identified. As regards the reference group of taxpayers, Luxembourg considered only taxpayers subject to transfer pricing rules and its tax ruling practice to be in a comparable factual and legal situation.

4.3.   LUXEMBOURG'S COMMENTS ON THE DOUBTS EXPRESSED IN THE OPENING DECISION

(296)

Luxembourg also specifically addressed the doubts expressed by the Commission in the Opening Decision regarding the contested tax ruling's compliance with the arm's length principle.

(297)

First, in response to the Commission's criticism that the contested tax ruling was approved in only 11 working days, Luxembourg argued that the process took much longer and involved meetings with Amazon representatives on 9 and 11 September 2003 as well as scrupulous examination by the tax authorities of the approach, Amazon's letters of 23 and 31 October 2003, and the transfer pricing report submitted by Amazon's tax adviser.

(298)

Second, Luxembourg argued that the Commission's concern that the contested tax ruling was granted in the absence of the required economic analysis is unfounded. A transfer pricing report was prepared to substantiate the transfer pricing arrangement proposed in the ruling request. It contains such standard elements as a functional analysis of both parties to the transaction (LuxOpCo and LuxSCS), the description of the underlying transaction and the relevant intellectual property, as well as selection of the transfer pricing methods and an assessment of the arm's length price.

(299)

Luxembourg explained that when the contested tax ruling was approved in 2003, Amazon's activities were new and increasing rapidly, with priority being given to long-term investment over short-term profitability. In 2003, Amazon recorded a loss and it was envisaged that Amazon would continue to invest heavily in technology for the immediate future. Since online retail is an activity with low margins subject to fierce competition, Amazon's strategy was to differentiate itself through technological innovation. As a consequence, the Intangibles were considered to be the essential source of value in Amazon's activities. The technology needed for the processes is highly sophisticated and continually improved through significant investment by LuxSCS.

(300)

According to the functional analysis presented in the TP Report, LuxSCS is responsible for maintaining and continually developing the Intangibles; LuxOpCo manages, operates and develops the retail trade and service activities through the EU websites using the Intangibles licensed from LuxSCS. According to Luxembourg, the economic life of the Intangibles was limited and required continual improvement and significant investment. Luxembourg added that LuxOpCo has not held and does not hold any intangible assets on its own. Under the terms of the IP License Agreement, any derived intangible asset developed by LuxOpCo is legally attributed and held by LuxSCS.

(301)

Luxembourg submitted that the contested tax ruling endorses a transfer pricing arrangement based on the TNMM to determine the level of the arm's length royalty paid by LuxOpCo to LuxSCS. The TNMM is a transfer pricing method which corresponds to Luxembourg transfer pricing rules and administrative practice. It is commonly used in tax rulings in Luxembourg and accepted by the 1995 OECD TP Guidelines. The acceptance of the TNMM by the Luxembourg tax administration reflected the functional analysis included in the transfer pricing report: LuxSCS holds, maintains and develops the business' most strategic elements, namely the Intangibles, which are hard to value. Luxembourg further argues that according to the License Agreement LuxOpCo only has limited rights and responsibilities with regards to the Intangibles and does not hold any IP itself. As a consequence, LuxSCS has viable alternatives for using the Intangibles to create a prosperous business; LuxOpCo, on the other hand, does not have any such alternatives. Therefore, LuxOpCo is regarded as being the less complex entity in comparison with LuxSCS and has been properly selected as the tested party. Luxembourg further claimed that, since online retail generates low margins, the choice of other methods could have exposed LuxOpCo to a risk of losses. The choice of the TNMM guaranteed that LuxOpCo's future profits would be more stable and in line with its profile. It also guaranteed that LuxOpCo's results would increase in line with the growing dimension of its activities in Luxembourg and in the EU and ensured legitimate predictability with regard to LuxOpCo's remuneration. Other methods would have produced more volatile results. In light of these considerations, Luxembourg claimed that the contested tax ruling cannot be regarded as accepting ‘the lowest possible outcome’ for LuxOpCo.

(302)

Third, in response to the Commission's doubt expressed in the Opening Decision that the royalty paid by LuxOpCo to LuxSCS is not related to output, sales, or profit, Luxembourg confirmed that the royalty is calculated as a residual profit. However, Luxembourg considered such an outcome inherent in the application of the TNMM and compliant with the functional and risk analyses.

(303)

Fourth, Luxembourg claimed that LuxOpCo's real financial return for each year of the relevant period fully complies with the arm's length principle. The arm's length remuneration for LuxOpCo was considered to lie in the interquartile range between [2-2,5] % and [5-10] % with a median value of [4-4,5] %, as indicated in the comparative analysis of the TP Report.

(304)

Fifth, as regards the doubt expressed on the relevance of the floor and cap for LuxOpCo's remuneration, Luxembourg argued that since Amazon made a loss in 2003 and companies in the comparative analysis were also loss-making, the floor guaranteed a positive remuneration increasing in line with expanding business. Furthermore, the cap and the ceiling encouraged LuxOpCo to manage its activities efficiently. Without this cap and this ceiling, LuxOpCo could simply increase its costs to increase its result. Given that the margin obtained by LuxOpCo over the period 2006-2013 was on average [3,5-4] % and was each year within the limits of the interquartile range, Luxembourg concludes that the ceilings and caps did not have any real and practical impact.

(305)

Luxembourg further argued that the taxable basis has not been capped and has increased in line with Amazon's expansion and investment in the EU. The remuneration margin was applied to all of LuxOpCo's operating costs, not just to its operating costs incurred in Luxembourg. Accordingly, the margin was applied to a wider basis than just the operating costs borne by LuxOpCo in Luxembourg, as it included the operating costs incurred by other subsidiaries in the EU, which were subsequently invoiced to LuxOpCo. If the remuneration received by LuxOpCo was calculated solely in relation to its Luxembourg operating costs, it would have had an average margin of [10-15] %. The figures provided by Luxembourg to support this argument are reproduced in the Table 18.

Table 18

LuxOpCo's taxable profit expressed in relation to operating expenses of LuxOpCo in Luxembourg (excluding costs rebilled by the EU subsidiaries) (a) and to the operating expenses of LuxOpCo including the costs rebilled EU subsidiaries (b)

(%)

Year

2006

2007

2008

2009

2010

2011

2012

2013

Total

(2006-2013)

(a)

13,8

12,0

10,9

10,4

11,4

11,5

11,0

[10 – 15]

[10 - 15]

(b)

4,1

4,4

4,2

4,2

3,9

3,8

3,2

[2,5 – 3]

[3,5 – 4]

(306)

Sixth, as regards the duration of the contested tax ruling, Luxembourg explained that it was originally envisaged to be valid for five accounting periods from the start of Amazon's activities in Luxembourg, which actually started in 2006 (319). Therefore the contested tax ruling was initially in application until 2011. Luxembourg further explains that, according to its administrative practice of the time, transfer pricing rulings were generally amended only if the activity model or market conditions changes significantly. By 2011, LuxOpCo's activities and operating model had remained unchanged, so that the transfer pricing arrangement was still deemed appropriate and the contested tax ruling was prolonged in 2011 for a further five years. Luxembourg additionally explains that, following the 2008 economic crisis, remuneration for comparable activities (online retail sales) were under significant pressure and Amazon's operating margins kept shrinking. In this context, Luxembourg considered the review of the pricing arrangement could have led to a reduction in LuxOpCo's remuneration.

4.4.   LUXEMBOURG'S COMMENTS ON M.COM AGREEMENTS, THE INTRAGROUP LICENSE AGREEMENTS, IP LICENSE AGREEMENTS AND OTHER INFORMATION

(307)

Luxembourg submitted its comments on the M.com Agreements, the intragroup license agreements, IP license agreements between Amazon group entities and third parties, and other internal financial and legal information of LuxOpCo, LuxSCS, AMEU and ASE, such as external valuation reports or TP reports regarding IP acquisition transactions, minutes of board meetings and general meetings of LuxOpCo's shareholders.

(308)

Luxembourg stated that its transfer pricing rules are indistinctly applicable to all groups of companies, domestic or international, and that Amazon was not treated more favourable than other groups, because Luxembourg applied its transfer pricing rules consistently.

(309)

Luxembourg questioned the relevance of the M.com Agreements for the case at hand. Except for the Target Agreement, they were concluded after Luxembourg issued its tax ruling. After reviewing the M.com Agreements, Luxembourg stated that it shares Amazon's view that the M.com Agreements reflect a business model that differs from the model put in place between LuxSCS and LuxOpCo. Therefore those agreements, including the agreements between Amazon and Borders, Circuit City, Target, ToysRUs and Waterstones, cannot be used for the purposes of a CUP analysis.

(310)

Luxembourg further claimed that Amazon's intragroup agreements are also not adequate for a CUP analysis, since these intra-group agreements are by definition not uncontrolled.

4.5.   LUXEMBOURG'S COMMENTS ON AMAZON'S SUBMISSION OF DOCUMENTS RELATED TO THE US TAX COURT PROCEDURE

(311)

On 6 July 2017, Luxembourg submitted its comments to Amazon's submissions to the Commission concerning documents used and created for the litigation procedure before the US Tax Court.

(312)

In its comments, Luxembourg supports Amazon's comments and conclusions and highlights that the Buy-in of LuxSCS values only the intangible assets themselves, separate from all other assets, functions and risks associated with Amazon's business.

(313)

According to Luxembourg, the US Tax Court's analysis established that [4,5-5] % of the gross merchandise sales (‘GMS’) would be an appropriate arm's length royalty rate for the Intangibles used to operate Amazon's European business, which is based on the most relevant benchmarks.

(314)

Luxembourg observes that LuxSCS received royalties from LuxOpCo corresponding to [3-3,5] % of the GMS, thus below the arm's length royalty rate as established by the US Tax Court. Consequently, if the US Tax Court's rate were to be applied, LuxOpCo would owe royalty payments to LuxSCS, thereby lowering its taxable income in Luxembourg.

(315)

Luxembourg therefore considers that LuxOpCo's taxable base was not unduly reduced as implied by the Commission in its Opening Decision, which is why the contested tax ruling did not confer a selective advantage on LuxOpCo.

5.   COMMENTS FROM INTERESTED PARTIES

5.1.   COMMENTS FROM AMAZON

5.1.1.   AMAZON'S COMMENTS ON ALLEGED LEGAL ERRORS

(316)

Amazon argued that the Commission did not correctly identify the reference framework and did not prove the selectivity of the measure in its Opening Decision. According to Amazon, the contested tax ruling should be reviewed against a specific rule of national law and/or administrative practice and not the corporate tax system as a whole (320). Therefore, the correct reference framework to assess the contested tax ruling is the arm's length principle as laid down in Article 164(3) and Article 18 LIR, together with the relevant administrative practice applying the provisions in question (321).

(317)

According to Amazon, there could only be a State aid concern if the contested tax ruling deviated from the normal interpretation and application of the arm's length principle in Luxembourg. Amazon argued that the widespread use of the residual profit split method revealed in the LuxLeaks database by the International Consortium of Investigative Journalists illustrates that the contested tax ruling did not deviate from the administrative practice of the Luxembourg tax administration (322).

(318)

Amazon also argued that the Commission did not demonstrate the selectivity of the measure and referred to the cases where characteristics of non-selective measures were stipulated (323).

5.1.2.   AMAZON'S COMMENTS ON THE DOUBTS EXPRESSED IN THE OPENING DECISION

(319)

Amazon's comments on the doubts expressed in the Opening Decision largely coincide with those of Luxembourg, insofar as it also argued that the ruling request was accompanied by a transfer pricing report and that that request was vigorously scrutinised.

(320)

Amazon further argued that the transfer pricing method chosen, the residual profit split, is not only in line with the OECD TP Guidelines, but also with Luxembourg transfer pricing rules and administrative practice (324). Amazon explained that the Intangibles which LuxSCS makes available to LuxOpCo under the License Agreement consist of the entirety of intellectual property, proprietary rights and any other intangible assets owned and developed by LuxSCS pursuant to an agreement with Amazon affiliates, or licensed from Amazon affiliates or entities otherwise associated with LuxSCS (325). It explained the role of LuxSCS compared to that of LuxOpCo and argued that, since LuxOpCo is an operating company that does not own unique resources, whereas LuxSCS owns, maintains and develops unique and difficult-to-value key value drivers, LuxOpCo is the least complex entity in that relationship. Therefore, under the residual profit split method, the TNMM is used in the first step to determine the return for the non-unique contributions by LuxOpCo, which has been designated as the ‘tested party’. The residual profit is then fully allocated to LuxSCS to reflect the fact that its contribution is essential to the European business (326).

(321)

Amazon added that LuxSCS's contributions, for which it is remunerated as a result of the transfer pricing arrangement endorsed by the contested tax ruling, consist not only of the sublicensing of Intangibles, but also of the assumption of risks associated with LuxOpCo's operations (327). By holding and financing the development of the Intangibles, LuxSCS took on significant risks, since it had to make the payments under the CSA. The risk borne by LuxSCS stems from the uncertainty inherent to funding R & D development. If the R & D activities do not generate any Intangibles to be successfully exploited, the parties to the CSA would have incurred significant losses. LuxSCS has the ability to control the business risks associated with the Intangibles, since LuxSCS exercises its control and development of the Intangibles through its participation in the CSA. Therefore, it is not necessary for LuxSCS to have employees of its own. Furthermore, in a situation where LuxOpCo would face losses, the Intangibles could be licensed to another company and therefore the control over exploitation of the Intangibles effectively lies with LuxSCS. Finally, as owner of the highly valuable Intangibles, LuxSCS has the financial capacity to absorb risks if these would materialise. LuxSCS could also rely on the cash flow from expected royalty income to fund future investment aimed at maintaining and upgrading the Intangibles.

(322)

Amazon further argued that the application of the CUP method to determine a fixed-rate royalty would have produced more volatile results, exposing LuxOpCo to the risk of incurring losses, and that therefore that method was abandoned. In any event, the Luxembourg tax administration has to start the transfer pricing analysis on the basis of the methodology selected by the taxpayer.

(323)

Amazon recalled that the application of any transfer pricing method typically produces a range of figures, all of which are equally reliable. Transfer pricing is not an exact science and any transfer pricing analysis will inherently result in a range of arm's length outcomes and a conclusion on an arm's length price and not the arm's length price. Moreover, referring to the OECD TP Guidelines, Amazon argued that transfer pricing requires the exercise of judgement. Therefore, a certain margin of appreciation is essential to keep the corporate tax system manageable.

(324)

Amazon submitted an ex post study it had commissioned in 2014 on management services, which compares European firms engaging in activities similar to those of Amazon's intercompany management service (‘the 2014 Study’) (328). In the 2014 Study, a search was conducted for comparable companies generally identified as engaged in activities of head offices and management consultancy activities. A comparable companies search in the Amadeus database using selection criteria related to geographic region (329), independence of the company, inadequate financial data, and keyword search in business descriptions (330) restrictions resulted in eleven companies (331) considered by the tax advisor to be sufficiently comparable to LuxOpCo. The analysis of the financial data of the selected companies for the years 2010-2012 resulted in the following interquartile range of the profit level indicator, defined as operating income (332) divided by total costs: 1,8 % to 12,0 % with median value of 7,0 %. Amazon considers the 2014 Study to confirm the arm's length nature of LuxOpCo's remuneration endorsed by the contested tax ruling, because LuxOpCo's mark-up as a percentage of Luxembourg-only operating costs remained within this range throughout the relevant period (333).

(325)

Amazon also defended the duration of the contested tax ruling. To substantiate the argument that following the financial crisis of 2008 the review of the ruling would most likely have resulted in a lowering of LuxOpCo's remuneration, Amazon submitted an ex post transfer pricing report it had commissioned in 2012 (‘the 2012 ex post TP Report’) (334) presenting the financial results of companies used in the comparable search contained in the TP Report. From the original set of comparable companies used in the TP Report, three no longer existed in later years and a further three were not considered comparable or had insufficient data. Two new company sets were prepared: one based on data from 2004-2006 and another 2008-2010. The analysis performed for different financial years resulted in the lower quartile of the return on costs (defined as operating profit to total costs) ranging from 1,1 % to 4,2 %; median: 3,1 % to 5,5 %; and upper quartile: 4,6 % to 8,5 %. On the basis of those outcomes, Amazon claimed that LuxOpCo's remuneration remained within the arm's length range throughout the relevant period.

(326)

Finally, Amazon argued that even if the Commission were to conclude that the contested tax ruling constitutes State aid, there would be no legal ground for the recovery of the alleged aid from Amazon. First, Amazon considers such a recovery would amount to unequal treatment, since Amazon would be the only undertaking repaying allegedly illegal aid, although according to Amazon many taxpayers were subject to the same treatment under the Luxembourg tax regime. Second, Amazon argues that it legitimately expected that the contested tax ruling was lawful and it could rely on it. In particular, Amazon could not have anticipated that the Commission, following an unprecedented and novel approach (335), would view the contested tax ruling as State aid. Finally, Amazon notes that the ten-year limitation period since the granting of alleged aid has lapsed. Amazon argues that the contested tax ruling is an individual measure. Therefore, the date on which the legally binding act was adopted by which the national authorities undertook to grant the aid is decisive for determining the date of its granting. According to Amazon, the contested tax ruling was granted on 6 November 2003 and, since more than 10 years had elapsed from the date of granting and the date in which the Commission issued its first information request on 24 June 2014, the Commission is barred from ordering recovery.

5.2.   EPICENTER

(327)

EPICENTER (336) considered the Opening Decision not to be mindful of the appropriate degree of discretion inherent to transfer pricing practice. EPICENTER considered the Commission to exceed its legal powers in direct taxation matters using the State aid rules to tackle harmful tax competition. In this sense, it will undermine the very need of legal and regulatory certainty. According to EPICENTER, the Commission's role should consist less in prescribing a preferred approach than in making sure that individual tax rulings are in compliance with the relevant OECD or national guidelines. Accordingly, the benchmark for assessing the degree of selectivity of any agreement is the general regulation applicable in each Member State.

5.3.   COMPUTER & COMMUNICATIONS INDUSTRY ASSOCIATION

(328)

Whereas the CCIA advocates for an effective State aid control, it considered the current investigations are focusing on politically convenient targets. The CCIA considered that using State aid rules in the present case will create legal and business uncertainty in Europe. The CCIA expressed its worries on the application of the prudent independent market operator test and requires the strict application of the national transfer pricing rules as the benchmark for assessing selectivity. It also argued that the application of the arm's length principle usually results in an arm's length range instead of a single arm's length price.

5.4.   ATOZ

(329)

ATOZ's main argument relates to the legal basis of the Commission assessment. According to ATOZ, the Luxembourg tax legislation did not include any provision specifying the application of the arm's length principle when the tax ruling was approved. Therefore, ATOZ argued that is not correct to consider the OECD transfer pricing rules incorporated in the Luxembourg legislation at that time. ATOZ thinks that the Commission's approach will create, amongst others, legal uncertainty among multinationals.

5.5.   FEDIL

(330)

According to Fedil, State aid investigations might undermine the legal certainty that tax rulings intend to provide to taxpayers. In Fedil's opinion, the assessment of the measure should be based on the Luxembourg legislation and administrative practice at the time, which did not include a general reference to the OECD TP Guidelines. Fedil argued that the Commission takes the view that there is a single truth in transfer pricing, which makes it impossible for companies to obtain upfront legal certainty.

5.6.   OXFAM

(331)

Oxfam expressed support for the Commission's investigation, encouraging the Commission to increase its investigation capacity also in view of the fact that it may be better placed than national bodies to structurally assess the tax ruling practices of the Member States. It called on the Commission to ensure that adequate sanctions are adopted in cases where selective advantages are confirmed and that harmful tax practices are phased out quickly.

5.7.   THE BOOKSELLERS ASSOCIATION OF THE UNITED KINGDOM & IRELAND LTD

(332)

According to the BA, Amazon's tax arrangements with Luxembourg allow an unfair advantage that is not available to independent booksellers in the UK. The BA stressed that, by routing all of its European sales through its Luxembourg headquarters, Amazon benefits from a significantly lower tax burden, regarding both VAT and corporate taxation. Therefore, the BA urges the Commission to challenge those tax deals which distort fair competition.

5.8.   THE EUROPEAN AND INTERNATIONAL BOOKSELLER FEDERATION, LE SYNDICAT DE LA LIBRAIRIE FRANÇAISE, THE FEDERATION OF EUROPEAN PUBLISHERS AND LE SYNDICAT DES DISTRIBUTEURS DE LOISIRS CULTURELS

(333)

The EIBF advocates for a level playing field for all book retailers and therefore welcomes the investigation by the Commission concerning Amazon's tax practices. The EIBF reiterated that it stands for a free and open market space which benefits the consumers.

(334)

The SLF, the FEP and the SDLC expressed their agreement with the EIBF's comments on the Opening Decision.

5.9.   BUNDESARBEITSKAMMER

(335)

The Austrian Bundesarbeitskammer supports the Commissions arguments from the Opening Decision and argues that, in general, those sorts of agreements and legal structures lower the worldwide taxes paid.

6.   INFORMATION SUBMITTED BY COMPANY X

(336)

Company X, which is a competitor of Amazon active in the online retail business in an EU market and does not want its identity to be disclosed, submitted market information to the Commission in relation to the investigation.

(337)

According to Company X, overall estimates about the relative importance of different cost positions in the online retail business is 50 % customer satisfaction, 30 % technology and 20 % physical structure and logistics. Although a solid IT platform is essential in the first phase of the launch of an e-commerce business, the main drivers for a successful and durable online retail operator are clients and marketing. Thus, the key assets to ensure growth in this market are a solid client database and the financial capability to undertake significant investments in marketing. The combination of those factors allows for the achievement of scale effects that are necessary to offset the significant fixed cost structure needed to run the online retail operations.

(338)

According to Company X, investment in technology for an online retail operator consists of around 4-5 % of turnover in a maintenance situation and 5-8 % when the operator is in an innovative phase. Amazon benefits from its existing technology, which gave it an advantage over competitors in Europe. The technology is constantly improved and adapted to customer needs. Amazon has been very aggressive in investing in technology. Its large investments are what allowed it to develop its platform, which today presents a hard-to-match competitive advantage. Company X has so far invested EUR 30-35 million cumulatively to develop its platform. However, the scale of the company is smaller than Amazon in its national market; the comparison in terms of size is about 1 to 6.

(339)

While Amazon's investments in logistics in the national market of Company X are substantial, the ability to undertake very significant investments in marketing, such as free shipping, and to undercut product prices is significantly more instrumental to Amazon's success.

(340)

If companies want to achieve scale and compete in the e-commerce business, they should develop a direct channel to own the customer base needed to build up a market share and compete in that business. Fully relying on Amazon is not consistent with the strategy of a company intending to become a leader in the e-commerce sector. However, competing with Amazon requires significant investments in building up the client base and, in most cases, the supporting technology and processes.

(341)

Small retailers (merchants) that sell products on Amazon's third-party platform Marketplace do not own the client's personal/transaction data from their transactions as a result of Amazon's contractual conditions. Amazon owns and collects the data on the customers. In particular, it is forbidden for merchants to solicit customers with new offers or promotions (e.g. newsletters).

(342)

While not always necessary, most retailers willing to achieve some relevance and build unique value propositions need to undertake significant investments in technology and operations. They might use Amazon's platform instead, but they would not own a valuable segment of the value chain and depend upon a direct competitor.

(343)

Marketing in the e-commerce business requires substantial investments. E-commerce companies normally invest around 30-35 % of their gross profit in marketing, depending on which scale they could reach in the market (obviously the bigger you become, the lower the percentage you have to dedicate to marketing). A more aggressive marketing strategy goes up to invest 2-3 times more, at significant losses for the company, thus requiring significant financial backing. Amazon Prime is one of Amazon's main marketing tools, the commercial program which offers free shipping for most items purchased through Amazon.

7.   COMMENTS FROM LUXEMBOURG ON THIRD PARTIES' COMMENTS AND ON INFORMATION SUBMITTED BY COMPANY X

7.1.   LUXEMBOURG'S COMMENTS ON THIRD PARTIES' COMMENTS

(344)

By letter dated 20 April 2015, Luxembourg expressed its agreement to the comments submitted by Amazon, FEDIL, CCIA, ATOZ and EPICENTER, whereas it considered that the other comments submitted in response to the Opening Decision were not relevant to the case.

(345)

In particular, Luxembourg indicated that Oxfam's observations did not refer to the Amazon case in particular, but were formulated in a general manner. Luxembourg considered the BA not to have commented on the information included in the Opening Decision, but on issues that are outside the scope of the present investigation. Luxembourg does not consider the comments of the EIBF and its members to provide new relevant information to the case. Finally, Luxembourg considered Bundesarbeitskammer's comments to be unfounded and inaccurate.

7.2.   LUXEMBOURG'S COMMENTS ON COMPANY X'S SUBMISSION

(346)

On 2 May 2016, Luxembourg submitted its comments to Company X's submission. Luxembourg stated that Amazon, being a market operator, is better placed to provide comments to Company X's submission. Therefore Luxembourg has shared a non-confidential version of Company X's submission with Amazon and understands that Amazon will provide its own comments.

8.   FURTHER SUBMISSIONS BY AMAZON

8.1.   SUBMISSIONS ON THE REMUNERATION FOR LUXSCS AND LUXOPCO BEING AT ARM'S LENGTH

(347)

In its submission of 18 January 2016, Amazon provided supplementary information to justify that the remuneration for LuxSCS and LuxOpCo endorsed by the contested tax ruling was at arm's length.

(348)

First, on the transfer pricing method used to determine the remuneration of LuxSCS and LuxOpCo, Amazon explained that the residual profit split method was chosen, since no sufficiently reliable comparable uncontrolled transaction was found to apply the CUP method. If the less reliable CUP method had been applied, it would have led to higher yearly royalty payments. Amazon further explained that, at the first stage of the residual profit split method, the TP Report applied the TNMM to determine LuxOpCo's arm's length remuneration as the tested party. The reason why LuxOpCo was chosen as the tested party is because LuxOpCo performs non-unique functions relative to LuxSCS, which owns the unique key value drivers of the European business. At the second stage of the residual profit split method, any residual profit or loss is allocated among the parties consistently with their functions and risks. Logically, the more unique a party's functions and risks, the greater the remuneration that it is justified to receive under the residual profit split method. The TP Report allocated the residual profit to LuxSCS in the view of its unique functions and significant risks relative to those of LuxOpCo.

(349)

Second, on the economic rationale underlying the transfer pricing methodology, Amazon explained that LuxSCS wants to incentivise its contractors to act in such a manner that contributes to the success of Amazon's global strategy. Thus, if Amazon had entered into a license agreement with a third party, it would have been rational and necessary to provide the licensee with the ability and incentives to undertake all the necessary investments and also to ensure that the correct incentives existed for the licensee to follow Amazon's strategy of maximising selection and price leadership.

(350)

According to Amazon, the royalty methodology ensures that LuxOpCo is profitable and does not have a risk of becoming loss-making. This was a real risk since, at the time the contested tax ruling was requested, the online retail market was not yet developed, online retailers were loss-making and LuxOpCo operated in a market with intense competition and low margins. In this respect, a return to the licensee on its cost base incentivises growth rather than a focus on short-term profit.

(351)

LuxSCS's remuneration structure was adopted because the volatility in the European business was anticipated. If a royalty expressed as a fixed percentage of sales had been agreed, LuxOpCo would have been loss-making during several years (337). Amazon referred in this respect to estimated levels of royalty in the TP Report (338). According to Amazon, this would have put in danger the capacity of LuxOpCo to make profits over a long period of time. Amazon also noted that LuxOpCo did not have the financial capacity to bear such losses (339).

(352)

Third, on the choice of profit level indicator, after having reviewed the TP Report submitted by Luxembourg in response to the Opening Decision, the Commission asked Luxembourg and Amazon to clarify whether the mark-up applied to determine LuxOpCo's arm's length remuneration was calculated on cost of goods and operating expenses, as explained in TP Report in the description of the financial analysis, or on ‘Annual Net Sales’ (340). Amazon explained that the return earned by LuxOpCo was based on a mark-up of [4-6] % on operating expenses, excluding the COGS (341). Amazon confirmed that the range reported in the transfer pricing report of 2,3 % to 6,7 %, with a median of 4,3 %, included the COGS of the comparable companies. The reference to the percentage of annual net revenue included in the table presenting the results of the peer review was included to point out that the amounts were weighted average dependent on the annual sales in a respective year.

(353)

Regarding the exclusion of the COGS from LuxOpCo's cost base, Amazon explained that the comparable companies had limited COGS whereas LuxOpCo's COGS were expected to be significant. If they had been included in the mark-up, it would have led to a distorted result (342). In any event, according to Amazon, if the COGS had been excluded from the calculation of the profit level indicator of the comparable entities identified in the TP Report, it would have resulted in a range from 3,7 % to 7,6 %, with a median of 4,9 %. Amazon submitted a table with the seven companies used in the TP Report, for which the mark-up on operating expense was additionally calculated excluding the COGS. Data was provided for only five of the seven companies. Whereas the mark-up on operating expense was not significantly higher than the mark-up on total costs for four out of the five companies for which data was provided (343), for one company the mark-up on operating costs was about five times higher than the mark-up on total costs (344). On that basis, the TP Report applied a mark-up of [4-6] % to the financial projections provided by Amazon to determine the relevant routine return of LuxOpCo. More specifically, LuxOpCo's return was calculated by multiplying the sum of LuxOpCo's operating expenses and costs expected to be incurred by the European affiliates, while COGS were not included in the calculation base (reference is made to Table 2 of this Decision, which reproduces this calculation as included in the TP report (345)).

(354)

Finally, the Commission noted that the TP Report did not include any reference to the floor and ceiling mechanism described in the ruling request. Asked by the Commission during a meeting held on 28 October of 2015 about this omission, Amazon explained that the floor and ceiling did not result in LuxOpCo's remuneration being outside the arm's length range. The mark up earned by LuxOpCo over the period was on average [3,5-4] % and was in each year within the interquartile range of 2,3 % to 6,7 % (346). Amazon further stressed at this meeting that the use of a single technology CUP was expected to give biased and volatile results.

8.2.   SUBMISSION ON INFORMATION SUBMITTED BY COMPANY X

(355)

Amazon questions whether Company X is actually comparable to LuxOpCo. Moreover, Amazon argues that the information provided by Company X should not be considered for the purposes of assessing the contested tax ruling, since neither Amazon nor the Luxembourg authorities had that information at the time the 2003 tax ruling request was made or when it was renewed in 2011.

(356)

In any event, Amazon considers that the information submitted by Company X does not support the finding that the contested tax ruling resulted in the grant of State aid to LuxOpCo. In particular, LuxOpCo agrees with Company X that e-commerce is a thin margin business. Indeed, LuxOpCo could not survive or grow on the market without the Intangibles it licensed from LuxSCS.

(357)

Amazon states that its business model revolves around technological innovation, such as search and browse tools, order processing and fulfilment, catalogue functions, customer service support and data management and analysis tools.

(358)

Amazon considers that the customer data that LuxSCS licenses to LuxOpCo is a key component of marketing and the scope of Amazon's Prime programme goes far beyond free shipping as it includes a variety of services and requires a complex underlying technology.

(359)

For Amazon, customer satisfaction is primarily driven by technology and by customer information, both made available to LuxOpCo as part of the Intangibles.

(360)

Consolidating and developing the customer base and the brand rests crucially on the Intangibles. Amazon considers that Company X confirmed that the Intangibles, constantly developed and improved, are key for a successful e-commerce operation such as LuxOpCo's, which supports that LuxOpCo is the tested party, because LuxSCS' contribution is more important.

(361)

Amazon considers that the royalty calculation method as endorsed by the contested tax ruling preserves LuxOpCo's long term viability, because the royalty rate is not excessively high and allows LuxOpCo to earn a return on its costs. Furthermore, the method incentivises LuxOpCo to create value from the use of the Intangibles by growing the business as much as possible, maximising selection and keeping price leadership, and the royalty rate calculation method incentivises LuxSCS to continue its investment into the Intangibles long-term.

(362)

Finally, Amazon concludes that Company X' statements about the shares of turnover which should be invested into technology for an e-commerce company amounting to 4 % to 8 % of sales confirm that LuxOpCo's royalty rate paid to LuxSCS, which amounts to an average of [5-10] % of LuxOpCo's turnover between 2006 and 2014 or [3-3,5] % of GMS and which includes a comprehensive bundle of Intangibles demonstrates that the royalty rate paid by LuxOpCo can be considered an arm's length rate and does not constitute a manifest departure from a reliable approximation of a market-based outcome.

8.3.   SUBMISSIONS ON AMAZON'S TECHNOLOGY-CENTRIC E-TAILING BUSINESS

(363)

Amazon states that its mission is to be ‘Earth's most customer-centric company, where customers can find and discover anything they might want to buy online, and endeavours to offer its customers the lowest possible prices’ (347). The mission to offer the broadest selection of products at the lowest prices in the most convenient way lies at the heart of Amazon's business and its implementation relies critically on technology.

(364)

According to Amazon, it is a ‘[…] technology company that approaches retail as an engineering problem’ (348) and technology not only provides the interface between Amazon and its customers, but is at the heart of every business process. Amazon's technology allows it to provide competitive pricing, suggests items of interest to potential customers, processes payments, manages the inventory and ships products to the customers. The scale of Amazon's operations requires that the business is run by a high degree of automation to handle inventory management, pricing and order processing. Amazon could not employ a sufficient number of persons to determine prices or in-stock levels of millions of individual products.

(365)

Amazon states that its e-commerce business must be available at all time with high speed response time to avoid customer dissatisfaction. Given its constant expansion, its technology infrastructure must be scalable and flexible. Therefore Amazon's software has a service-oriented architecture. The functions that Amazon's business operations require are developed as componentized pieces that can be combined for interaction and cooperation. Such an architecture has many advantages, such as individual optimisation, and maintenance of certain software being possible. This architecture also facilitates the launch of new services and improvements. If Amazon were to refrain from maintaining and updating its underlying technology, customers would notice as the e-tail experience that carries Amazon's commercial success would change and Amazon's business operations would fail.

(366)

The Amazon websites and mobile applications encompass several functionalities, such as obtaining and maintaining customer identity information, creating and maintaining a catalogue, creating and displaying web and mobile app pages, searching and browsing, constructing and placing orders, payment processing, interaction with fulfilment centres, customer reviews, personalisation and community features.

(367)

Other technology tools are website administration tools, the configuration repository, tools for the operation and analytics of the website, vendor and seller management software, inventory management software, catalogue software and pricing software. As regards the latter, Amazon states that 99 % of prices are set by an automated process, while there are also cases of manual price setting, albeit exceptional. All manual price changes in Europe have to be approved by the European Price Manager of LuxOpCo.

(368)

Amazon also has marketing software, aimed at generating traffic to its websites, internal and external marketing techniques, such as search marketing (through cooperation with search engines such as Google), search engine optimisation tools, paid search advertising tools, and email marketing tools.

(369)

Further technology includes order fulfilment software, such as for the European Fulfilment Network (‘EFN’), picking and packaging software and customer service software.

(370)

Amazon develops the key software for its e-tailing business in-house. Amazon states that technology development activities are overseen by teams in the US. Testing and bug-fixing of the websites and the software tools is entirely done in the US. Over [60-65] % of its [30 000-40 000] R & D employees are located in the US. Of the [1 000-10 000] R & D employees active in Europe, [100-200] are based in Luxembourg.

(371)

Finally, Amazon states that every aspect of the traditional retailing has been rethought to make it more efficient, less costly and more serving customer needs. Surrounded by a wide e-commerce environment, Amazon's customer experience created by its technology is setting Amazon apart from its competitors and strengthens its brands. Even brief time lags in ordering or minor hiccups in fulfilment undermine the customer experience, harm Amazon's brand and lead to a loss of sales because customers turn away.

(372)

Amazon states that its trademark-related intangibles had a useful life of 10-15 years as of 1 January 2005. The customer database had an estimated useful life of 6-10 years, and the Technology had a useful life of two to five years as of 1 January 2005.

8.4.   SUBMISSIONS ON CRITICAL THREATS FOR AMAZON'S EUROPEAN OPERATIONS

(373)

In its submission of 27 February 2017, Amazon submitted to consider the following three critical threats for its European businesses:

(374)

Competition: the loss of business to competition is Amazon's main business threat, since e-commerce is highly competitive. Competition is largely driven by innovation and competitors that did not innovate left the market. Amazon faces different pressure and competitors in various markets and there are local specificities in relation to risks from competition.

(375)

Customer adoption of new products, services and technologies: Amazon's growth and its expansion into new categories and geographic regions entails the risk that customers do not adopt the new offerings or products. In the same vein, Amazon bears the risk of website outages, which can have significant costs for its business.

(376)

Finally, local economic and political conditions and changes to the legal framework constitute a risk or could be a threat for Amazon's European business. Low degrees of internet use and credit card use pose significant challenges to Amazon, making it impossible to create a growing business. Government regulation may render Amazon's business model impracticable.

8.5.   AMAZON'S SUBMISSIONS OF 29 MAY 2017

(377)

On 29 May 2017, Amazon submitted a statement to the US Tax Court procedure and a newly commissioned transfer pricing report.

(378)

According to Amazon, the decision of the US Tax Court, in application of the CUP method, resulted in an arm's length royalty rate for the intangibles amounting to [4,5-5] % of GMS (349).

(379)

Amazon stated that LuxSCS' acquisition of the rights to the technology, brand and customer information was recognized by all parties to the US litigation procedure. Therefore, Amazon refers to the [4,5-5] % royalty rate of GMS as a benchmark for the appropriate arm's length royalty to be received by LuxSCS. Moreover, according to Amazon, the benchmark should be seen as minimum, taking into account that this royalty rate does not consider goodwill and the enhancements to the intangibles made under the CSA after 2005/2006, which LuxOpCo received.

(380)

Amazon therefore claims that the aggregate royalty rate that LuxSCS received over the relevant period 2006 to 2014 was in fact lower than the royalty rate as determined by the US Tax Court, namely [3-3,5] % of GMS. Based on Amazon's comments on the US Tax Court judgement, LuxSCS therefore received a too low royalty rate from LuxOpCo and thus Amazon considers that the 2003 tax ruling could not entail any advantage for LuxOpCo.

(381)

Amazon considered that an exhaustive evaluation of trial-tested facts was carried out during the US litigation procedure including expert records. The decision of the US Tax Court confirmed previous submissions of Amazon, in particular that technology is a key value driver for Amazon's business, which required investment and continuous innovation and that the integration of Amazon's European operations responded to business needs and finally that the European e-commerce environment was subject to intense competition and characterised by low margins during the relevant period.

(382)

Amazon commissioned [Advisor 1] to do a new Transfer Pricing Report, the purpose of which was to verify ex post whether the royalty paid by LuxOpCo to LuxSCS in accordance with the contested ruling was at arm's length (the ‘2017 ex post TP Report’) (350). The report examines the level of the royalty from the perspective of two transfer pricing methods: the CUP method and the TNMM.

(383)

As regards the CUP analysis, the royalty payments from LuxOpCo to LuxSCS during the relevant period were compared to the royalty determined in the TP Report and in the US Tax Court's opinion. The 2017 ex post TP Report claims that the royalty actually paid by LuxOpCo to LuxSCS was below the range of royalty rates determined with reference to the [A] agreement in the TP report (351). It further claims that the royalty paid by LuxOpCo to LuxSCS falls below the royalty rate of [4,5-5] % established in the US Tax Court's opinion also through the use of the CUP method (352). In this respect, it clarifies that the Court's opinion sets out an aggregate royalty rate of GMS as ‘initial (or starting) arm's length royalty rates for the Intangibles existing as of May 1, 2006’ (353).

(384)

The 2017 ex post TP Report further claims that several upwards adjustments should be made to the royalty payment from LuxOpCo to LuxSCS due to the differences between the License Agreement and the initial Buy-In. In this respect, the report finds that the ‘one-off transfer of pre-existing intangibles between the U.S. counterparties and LuxSCS’ is different from the License Agreement, since LuxOpCo would have to pay a royalty not only for the value of the IP that existed at the time where the License Agreement was concluded, but also for ‘all enhancements, developments, or improvements, whose costs are solely borne by LuxSCS’ (354). Upwards adjustments should also be made to account for a variety of intangibles which were made available to LuxOpCo and were not the subject of the US Tax Court's opinion, for temporal differences, and for the cap and floor applied to royalty paid by LuxSCS, which ‘operated to mitigate risks and provide a stable income stream to LuxOpCo in line with its function and risk profile’ (355). Downward adjustments were not considered necessary as LuxOpCo's contributions to the development, enhancement and maintenance of the Intangibles were not taken into account (356).

(385)

The conclusion of the CUP analysis in the 2017 ex post TP Report is that the aggregate royalty paid by LuxOpCo to LuxSCS during the relevant was ‘reasonable and in line with economic reality’.

(386)

As regards the TNMM analysis, the 2017 ex post TP report begins with a functional analysis (357) to determine which party to the License Agreement should be the tested party, i.e. the party carrying out less complex functions.

(387)

The functional analysis of LuxOpCo was performed on the basis of its role within the European value chain as of June 2014, since it was considered that following the gradual increase of LuxOpCo's staff over the whole period under review, its functional profile as of June 2014 would reflect the maximum contribution to value creation by LuxOpCo during that period. According to the 2017 ex post TP Report, LuxOpCo heavily relied on tools and technology to manage related business risks and did not autonomously manage or assume any significant risks. It also did not create a working capital need beyond those falling within its functional scope as a management company. LuxOpCo's main activities were managerial oversight over the procurement, sale, marketing, and distribution of products to third party customers via the European Web Sites. Those activities were heavily dependent on the Intangibles which related, inter alia, to the pricing of goods, inventory management, support for fulfilment centre activities, online payment processing, fraud detection, customer service operations, logistics, and advertising licensed to LuxOpCo. LuxOpCo did not own, nor develop or invest in the development of any of the Intangibles during the period under review. Instead, LuxOpCo only held standard business equipment assets and inventory related to Amazon's European retail business. Over the relevant period, LuxOpCo was confronted with various strategic, financial, operational, etc. risks in its day-to-day operations. Most of the risks relate directly or indirectly to the technology underpinning Amazon's offering or its global strategy of expanding into new product categories and services. To manage and control these risks effectively, Amazon implemented strict management policies at group level. Finally, in a business driven by technology, LuxOpCo did not independently assume or manage any significant business risks and instead relied on the technology to manage or assume the related business risks.

(388)

As regards LuxSCS, the 2017 ex post TP Report only points to the fact that it holds the Intangibles as a result of its participation in the CSA.

(389)

On the basis of this functional analysis, the 2017 ex post TP Report concludes that LuxOpCo is an example of a value chain segment that does not own, manage or control any IP rights, but has a functional profile comparable to that of a ‘management company’ with oversight for logistics, fulfilment, and inventory related to the European online retail operations, while facing limited risks and owning only routine tangible assets (358). Accordingly, LuxSCS, since it holds the Intangibles by virtue of its participation in the CSA, was considered to be a more complex function. The 2017 ex post TP Report explains in this respect that ‘[b]oth the functional analysis and the factual background demonstrated that LuxOpCo's activities were heavily dependent on and of secondary importance to the economically significant intangibles that LuxOpCo did not own but obtained access to under the License Agreement with LuxSCS' rights to the Intangibles stemming from its participation in the CSA with certain group companies before and during the period under review’ (359).

(390)

The 2017 ex post TP Report explains that a reliable financial indicator should reflect the contribution of LuxOpCo to the overall value chain. Since LuxOpCo is presented in the report as the party, which ‘[…] did not autonomously decide what products to sell, how to price the products or how to promote the products, as these functions are embedded in the technological tools received via License Agreement’ (360), it is not considered appropriate to apply a net profit indicator based on sales (361). The 2017 ex post TP Report finds that operating costs is the most reliable profit level indicator of the value of the functions performed, risks assumed and assets used by LuxOpCo. The report applies a profit level indicator which is calculated as Operating Profit (Loss) divided by Operating Expenses (362).

(391)

The report then proceeds to update the economic analyses made in 2003 and in 2014, determining benchmark returns for activities comparable to those of LuxOpCo and carrying out a new analysis to determine benchmark returns. Based on these analysis, it was found that in all years from 2006 to June 2014, LuxOpCo's remuneration was within the interquartile range resulting from benchmark returns earned for activities comparable to those of LuxOpCo. Therefore, the 2017 ex post TP Report concludes that LuxOpCo's remuneration was at arm's length.

9.   ASSESSMENT OF THE CONTESTED MEASURE

9.1.   EXISTENCE OF AID

(392)

According to Article 107(1) of the Treaty, any aid granted by a Member State or through State resources in any form whatsoever which distorts or threatens to distort competition by favouring certain undertakings or the provision of certain goods shall be incompatible with the internal market, in so far as it affects trade between Member States.

(393)

According to settled case-law, for a measure to be categorised as aid within the meaning of Article 107(1) of the Treaty, all the conditions set out in that provision must be fulfilled. First, there must be an intervention by the State or through State resources. Second, the intervention must be liable to affect trade between the Member States. Third, it must confer a selective advantage on the recipient. Fourth, it must distort or threaten to distort competition (363).

(394)

As regards the first condition, the contested tax ruling was issued by the Luxembourg tax administration, which is an organ of the Luxembourg State. That ruling entailed an acceptance by that administration of a transfer pricing arrangement which enabled LuxOpCo to assess its corporate income tax liability in Luxembourg on an annual basis during the relevant period. LuxOpCo subsequently filed its annual corporate income tax declaration on the basis of that arrangement, which was in turn accepted by the Luxembourg tax administration as corresponding to its corporate income tax liability in Luxembourg. The contested measure is therefore imputable to Luxembourg.

(395)

As regards the measure's financing through State resources, the Court of Justice has consistently held that a measure by which the public authorities grant a tax exemption which, although not involving a positive transfer of State resources, places the undertaking to whom it applies in a more favourable financial situation than other taxpayers may constitute State aid (364). As will be demonstrated in Sections 9.2 and 9.3, the contested tax ruling results in a lowering of LuxOpCo's corporate income tax liability in Luxembourg as compared to similarly situated corporate taxpayers. By renouncing tax revenue that Luxembourg would otherwise have been entitled to collect from LuxOpCo, the contested tax ruling should be considered to give rise to a loss of State resources.

(396)

As regards the second condition for a finding of aid, LuxOpCo is part of the Amazon group, a multinational corporate group operating in several Member States. LuxOpCo operates Amazon's European online retail and service business through the EU websites. The products and services concerned by that business are subject to trade between Member States, so that any State intervention in its favour is liable to affect intra-Union trade (365). Moreover, by providing a favourable tax treatment to Amazon, Luxembourg has potentially drawn investment away from Member States that cannot or will not offer a similarly favourable tax treatment to companies forming part of a multinational corporate group. Since the contested tax ruling strengthens the competitive position of its beneficiary as compared with other undertakings competing in intra-EU trade, it must be considered as affecting such trade (366).

(397)

Similarly, a measure granted by the State is considered to distort or threaten to distort competition when it is liable to improve the competitive position of an undertaking as compared to other undertakings with which it competes (367). To the extent the contested tax ruling relieves LuxOpCo of corporate income taxes it would otherwise have been obliged to pay, the aid granted as a result of that ruling constitutes operating aid, in that it relieves LuxOpCo from a charge that it would normally have had to bear in its day-to-day management or normal activities. The Court of Justice has consistently held that operating aid distorts competition (368), so that any aid granted to Amazon should be considered to distort or threaten to distort competition by strengthening the financial position of Amazon on the markets on which it operates. As regards Amazon in particular, it operates an online retail business which competes both with other online retailers and with brick-and-mortar retailers active in Luxembourg and throughout the European Union. The [Advisor 3] Report submitted by Amazon describes the online retail business as a business characterised by intense competition and thin profitability margins. By relieving Amazon of a tax liability it would otherwise have had to bear and which competing undertakings have to carry, the contested tax ruling frees up financial resources for Amazon to invest in its business operations, which in turn affects the conditions under which it can offer its products and services to consumers, thereby distorting competition on the market. The fourth condition for a finding of aid is therefore also fulfilled.

(398)

As regards the third condition for a finding of aid, the function of a tax ruling is to establish in advance the application of the ordinary tax system to a particular case in view of its specific facts and circumstances. However, like any other fiscal measure, the grant of a tax ruling must respect the State aid rules. Where a tax ruling endorses a result that does not reflect in a reliable manner what would result from a normal application of the ordinary tax system, without justification, that ruling will confer a selective advantage on its addressee in so far as that selective treatment results in a lowering of that taxpayer's tax liability in the Member State as compared to companies in a similar factual and legal situation. As the Commission will demonstrate in Sections 9.2 and 9.3, the contested tax ruling confers a selective advantage on Amazon in the form of a lowering of its corporate income tax liability in Luxembourg as compared to corporate taxpayers in a comparable factual and legal situation.

(399)

In Section 9.2, the Commission will demonstrate that the contested tax ruling confers an economic advantage on Amazon. It does so by endorsing a transfer pricing arrangement that produces an outcome that departs from a reliable approximation of a market-based outcome as a result of which LuxOpCo's taxable base is reduced for the purposes of determining its corporate income tax liability. In Section 9.3.1, the Commission will conclude that since that advantage is granted only to Amazon, it is selective in nature. According to settled case-law, in the case of an individual aid measure, like the contested tax ruling, ‘the identification of the economic advantage is, in principle, sufficient to support the presumption that it is selective’ (369) without it being necessary to analyse the selectivity of the measure according to the three-step selectivity analysis devised by the Court of Justice for State aid schemes (370).

(400)

Nevertheless, for the sake of completeness, the Commission will also examine the contested tax ruling against that three-step selectivity analysis to demonstrate that it is also selective under that analysis. In Section 9.3.2.1 it will demonstrate that the advantage granted by the contested tax ruling is selective in nature because it favours Amazon as compared to other corporate taxpayers subject to corporate income tax in Luxembourg whose taxable profit reflects prices negotiated at arm's length on the market. In Section 9.3.2.2 it will further demonstrate that the advantage granted by the contested tax ruling is selective in nature because it favours Amazon as compared to other corporate taxpayers belonging to a multinational corporate group that engage in intra-group transactions and that, by virtue of Article 164(3) LIR, must estimate the prices for their intra-group transactions in a manner that reflects prices negotiated by independent parties at arm's length on the market.

9.2.   ADVANTAGE

(401)

Whenever a measure adopted by the State improves the net financial position of an undertaking, an advantage is present for the purposes of Article 107(1) of the Treaty (371). In establishing the existence of an advantage, reference is to be made to the effect of the measure itself (372). As regards fiscal measures, an advantage may be granted through different types of reduction of an undertaking's tax burden and, in particular, through a reduction in the taxable base or in the amount of tax due (373).

(402)

The contested tax ruling endorses a transfer pricing arrangement that enabled LuxOpCo to assess its taxable profit for corporate income tax purposes on an annual basis, which in turn determined its corporate income tax liability in Luxembourg during the relevant period. The Court of Justice has previously held that ‘[i]n order to decide whether a method of assessment of taxable income […] confers an advantage on [its beneficiary], it is necessary […] to compare that [method] with the ordinary tax system, based on the difference between profits and outgoings of an undertaking carrying on its activities in conditions of free competition’ (374). Accordingly, a tax ruling that enables a taxpayer to employ transfer prices in its intra-group transactions that do not resemble prices which would be charged in conditions of free competition between independent undertakings negotiating under comparable circumstances at arm's length confers an advantage on that taxpayer, in so far as it results in a reduction of the company's taxable income and thus its taxable base under the ordinary corporate income tax system. The principle that intra-group transactions should be remunerated as if they were agreed to by independent companies negotiating under comparable circumstances is referred to as the ‘arm's length principle’.

(403)

The essence of the arm's length principle is to ensure that transactions concluded between associated companies (controlled transactions) are priced for tax purposes under the same conditions as comparable transactions concluded at arm's length between independent companies (uncontrolled transactions). When there are conditions made or imposed between two associated companies in their intra-group transactions which differ from those which would be made between independent companies in uncontrolled comparable transactions, the arm's length principle requires appropriate transfer pricing adjustments to be performed to neutralise such differences and thereby ensure that the integrated (group) companies are not treated more favourably than non-integrated (stand-alone) companies for tax purposes (375). In this way, the profit that the associated companies derive from their intra-group transactions is determined and ultimately treated no more favourably than the profit derived from transactions concluded by independent companies at arm's length on the market. Indeed, it is the prices charged by independent companies on the market or, as stated by the Court of Justice, ‘the difference between profits and outgoings of an undertaking carrying on its activities in conditions of free competition’ (376), that determine their taxable income. If a tax administration allows associated group companies to charge prices for their intra-group transactions that are below market prices, an economic advantage is conferred upon those companies in the form a tax base reduction.

(404)

In response to the argument of Luxembourg and Amazon that, because transfer pricing is not an exact science (377), the assessment by the Commission of the transfer pricing arrangement endorsed by the contested tax ruling should necessarily be limited, the Commission recalls that the approximate nature of transfer pricing has to be viewed in the light of its objective. The objective of transfer pricing is to find a reasonable estimate of an arm's length outcome on the basis of reliable information (378). The pursuit of that objective would be impossible if the approximate nature of the transfer pricing analysis could be invoked to justify a transfer pricing arrangement producing an outcome that departs from a reliable approximation of a market-based outcome.

(405)

Similarly, Luxembourg's argument that the Commission, in undertaking such an assessment, improperly replaces the Luxembourg tax administration in the interpretation of national tax law (379), if accepted, would remove fiscal measures in general and transfer pricing rulings in particular from the scrutiny of the State aid rules. The Court of Justice has long confirmed that measures concerning direct taxation which places certain undertakings in a more favourable financial position than undertakings in a comparable factual and legal situation can give rise to State aid in the same way as direct subsidies (380). According to the Court of Justice, any measure the Member States adopt in the field of direct taxation must comply with the State aid provisions of the Treaty, which bind them and enjoy supremacy over their domestic legislation (381). That certainly applies to transfer pricing rulings in the form of advanced pricing arrangements, since they endorse methods of assessment of the taxable base, and thereby the taxable income, for individual undertakings. Any reduction of the taxable base resulting from the application of such a method gives rise to an economic advantage.

(406)

Consequently, to establish that the contested tax ruling confers an economic advantage, the Commission must demonstrate that the transfer pricing arrangement it endorses produces an outcome that departs from a reliable approximation of a market-based outcome resulting in a reduction of LuxOpCo's taxable basis for corporate income tax purposes. The Commission considers the contested tax ruling to produce such an outcome.

(407)

First and foremost, the Commission considers the transfer pricing arrangement to be based on the inaccurate and unsubstantiated assumption that LuxSCS would perform unique and valuable functions in relation to the Intangibles, whereas LuxOpCo would perform solely ‘routine’ management functions. According to the information provided to the Commission, LuxOpCo performed the unique and valuable functions, used the assets and assumed substantially all the risks that contributed to the development, enhancement, management and exploitation of the Intangibles. LuxOpCo also performed the functions, used the assets and assumed substantially all the risks that are of strategic and vital importance to the generation of profits from Amazon's European online retail and service business. By contrast, LuxSCS did not perform any unique and valuable functions in relation to the Intangibles, nor in relation to Amazon's European operations, but at most carried out certain limited general administrative functions to maintain its legal ownership of the Intangibles (382). By endorsing a transfer pricing arrangement that attributes a remuneration to LuxOpCo solely for the allegedly routine functions performed by it and that attributes the entire profit generated by LuxOpCo in excess of that remuneration to LuxSCS in the form of a royalty payment, the contested tax ruling produces an outcome that departs from a reliable approximation of a market-based outcome, which confers an economic advantage on LuxOpCo in the form of a reduction of its taxable base for corporate income tax purposes. This reasoning is developed in Section 9.2.1.

(408)

In addition, by a subsidiary line of reasoning and without prejudice to the conclusion in the previous Recital, the Commission concludes that even if the Luxembourg tax administration were right to have accepted the inaccurate and unsubstantiated claim that LuxSCS would perform unique and valuable functions in relation to the Intangibles, which the Commission contests, the transfer pricing arrangement endorsed by the contested tax ruling is nevertheless based on improper methodological choices that produce an outcome departing from a reliable approximation of a market-based outcome, which also confer an economic advantage on LuxOpCo in the form of a reduction of its taxable base for corporate income tax purposes. The subsidiary line of reasoning is developed in Section 9.2.2.

9.2.1.   PRIMARY FINDING OF AN ECONOMIC ADVANTAGE

(409)

Since the essence of the arm's length principle is to reflect the economic realities of the controlled taxpayer's particular conditions and apply as a benchmark the conditions applied in comparable transactions between independent parties, the first step of a transfer pricing analysis is to identify the commercial and financial conditions between the taxpayer requesting a transfer pricing ruling and its associated companies in the transaction (or transactions) under analysis. As acknowledged by the TP Report, the intra-group transaction being priced by the contested tax ruling is the License Agreement concluded between LuxSCS and LuxOpCo.

(410)

After the identification of the relevant intra-group transaction, the second step of a transfer pricing analysis is the comparison of the conditions of those transactions with the conditions of comparable transactions between independent companies (i.e. the comparability analysis) so that the intra-group transaction can be priced. In transactions between two independent companies, that price will reflect the functions that each company performs (taking into account assets used and risks assumed). Therefore, in determining whether controlled and uncontrolled transactions or companies are comparable, a functional analysis is necessary. The functional analysis seeks to identify and compare the economically significant activities and responsibilities undertaken, assets used and risks assumed by the parties to the transaction(s) being priced (383).

(411)

The Commission does not consider the transfer pricing arrangement endorsed by the contested tax ruling to result in a reliable approximation of a market-based outcome because it is based on an improper functional analysis. The contested tax ruling endorses a transfer pricing arrangement as a result of which the transfer price for the License Agreement – i.e. the annual royalty due by LuxOpCo to LuxSCS for the license to the Intangibles – is determined as the residual profit generated by LuxOpCo in excess of an arm's length remuneration for the allegedly ‘routine functions’ performed by that company. The TP Report on which that transfer pricing arrangement was based did not, however, examine how the functions performed, assets used and risks assumed by LuxSCS justify the attribution of the entire residual profit of LuxOpCo to it in the form of a royalty payment (384). Therefore, the contested tax ruling is based on the inaccurate and unsubstantiated assumption that LuxSCS would perform unique and valuable functions in relation to the Intangibles, whereas LuxOpCo would perform solely ‘routine’ management functions in relation to Amazon's European online retail business.

(412)

According to Amazon, LuxSCS owns, maintains and develops unique and difficult-to-value key value drivers in the form of the Intangibles, whose contribution is essential to the European retail business. By contrast, LuxOpCo does not own, manage or control any IP rights, but has a functional profile comparable to that of a management company with oversight over the procurement, sales, marketing and distribution of products to customers via the EU websites (385). Relying on the [Advisor 3] report, Amazon further argued that the online retail business is similar to the physical retail business and that, in the case of retailers be it online or physical, the vast majority of costs are variable. Therefore, the impact of economies of scale on profitability is limited. These factors, together with the intense competition characteristic to online retail, would have justified attributing a limited return to LuxOpCo, like the one endorsed by the contested tax ruling.

(413)

The Commission does not agree with this functional analysis, as will be explained in detail in Sections 9.2.1.1 and 9.2.1.2.

(414)

Had a proper functional analysis been performed for the purposes of obtaining the contested tax ruling, the Luxembourg tax administration should have concluded that LuxSCS does not perform any unique and valuable functions in relation to the Intangibles for which it merely holds the legal title by virtue of the Buy-In Agreement and the CSA. In particular, LuxSCS does not conduct or control any of the activities related to the development, management, protection and exploitation of the Intangibles, but passes those functions on to LuxOpCo under the License Agreement, without any reservation of LuxSCS supervising LuxOpCo's activities in that respect. LuxSCS has no employees who would be able to control those functions, nor does LuxSCS incur the cost related to the performance of those functions.

(415)

Instead, it is LuxOpCo that performs unique and valuable functions in relation to the Intangibles, that uses all assets associated with those functions, and that assumes substantially all the risks associated therewith. In addition, it is LuxOpCo, supported by the EU Local Affiliates, that performs unique and valuable functions in the operation of Amazon's European online retail and service business which are of strategic and vital importance to the generation of profits from that business, that uses all assets associated with those functions, and that assumes substantially all risks associated therewith.

9.2.1.1.    Functional analysis of LuxSCS

(416)

Amazon claims that ‘LuxSCS had the authority to take decisions and participate in the CSA, was endowed with own financial means and was capable of bearing its risks. By holding the Intangibles and funding their development (or, sometimes, their acquisition), LuxSCS had an essential role in controlling the development, the maintenance and the protection of the Intangibles […]’ (386).

(417)

The Commission does not dispute that LuxSCS, as a party to the Buy-In Agreement and the CSA, is the legal owner of the rights to exploit, further develop and enhance the Intangibles for the purposes of Amazon's European retail and service business. Nor does it dispute that, LuxSCS was contractually tasked by A9 and ATI under the CSA with several functions and assigned several risks in relation to the Intangibles. However, as a result of the License Agreement, those functions and risks were exclusively and irrevocably licensed to and effectively performed and assumed by LuxOpCo for the entire lifetime of the Intangibles (387).

(418)

None of the information provided to the Commission demonstrates that LuxSCS performed, or had the capacity to perform any active and critical functions in relation to the development, enhancement, management, and exploitation of the Intangibles which would justify attributing to it almost all of the profit generated by LuxOpCo in the operation of Amazon's European retail and service business (Recitals 419 to 429). Nor could LuxSCS have been considered to have outsourced those functions to another party and it did not have the capacity to control or supervise the execution of thereof (Recitals 427 to 428). LuxSCS also did not use any valuable assets in relation to that business, but merely held the Intangibles in a passive manner as the legal owner thereof (Recitals 431 to 435). Finally, LuxSCS did not assume, nor did it have the capacity to assume and control, the associated risks in this regard (Recitals 436 to 445).

9.2.1.1.1.   Functions performed by LuxSCS

(419)

LuxSCS is the legal owner and contractual licensor of the Intangibles. However, under the License Agreement, LuxSCS granted LuxOpCo an exclusive and irrevocable license to the economic exploitation of the Intangibles in Europe and a right to further develop, enhance and manage the Intangibles for their entire lifetime (388), without any reservation of LuxSCS managing or supervising LuxOpCo's activities in that respect. Under that agreement, LuxOpCo was also granted the responsibility for concluding and managing sublicenses with associated group companies (389) and granted all rights to prevent IP infringements of the Intangibles (390). Finally, LuxOpCo was responsible for ensuring compliance with all applicable laws, rules and regulations, including export and privacy laws and regulations that may apply to its use of the Intangibles (391).

(420)

Consequently, as a result of that exclusive license, LuxSCS was no longer entitled to economically exploit the Intangibles in Amazon's European operations and therefore could not perform any active and critical functions in relation to their development, enhancement, management or exploitation in that respect (392). Thus, while the legal ownership of the Intangibles and any derivative works thereof stayed with LuxSCS during the relevant period (393), the aforementioned active and critical functions in relation to the Intangibles were performed by LuxOpCo.

(421)

Even if LuxSCS had been entitled to perform such functions, it did not have the capacity to carry out, manage or control them during the relevant period. It had no employees, as confirmed by the contested tax ruling, which endorsed the conclusion in Amazon's letter of 31 October 2003 that LuxSCS' very limited activities do not lead to it carrying out a ‘commercial activity’ (394) or having a taxable presence in Luxembourg (395). In fact, as confirmed by the TP Report and Amazon's letter of 20 April 2006 to the Luxembourg tax administration, LuxSCS was not supposed to perform any other activity during the relevant period beyond the ‘mere holding’ of the Intangibles and the shares in its subsidiaries (396) and receiving passive income in the form of royalties and interests from those subsidiaries (397).

(422)

In the absence of employees, the only means by which such functions could have been performed by LuxSCS itself would have been through its sole manager or through its general meetings. However, the resolutions of the sole manager and the minutes of its general meetings, summarised in Table 14, do not demonstrate that any active or critical decision-making was performed by LuxSCS with regard to the aforementioned functions in relation to the Intangibles, nor that an effective control or supervision of such functions was carried out during the relevant period. Rather, the resolutions and decisions taken consisted mainly of administrative and shareholder tasks, i.e. approving accounts, receiving dividend payments, approving capital increases and the financing of subsidiaries and, in a few instances, approving the appointment of managers of LuxOpCo and other subsidiaries of LuxSCS. In addition, the complete absence of representatives of LuxSCS in the IP Steering Committee, which is the main forum of discussion for the management of the Intangibles in Europe (398), confirms that LuxSCS played no active role as regards the aforementioned functions and the associated risks during the relevant period (399).

(423)

Even the decisions to enter into the Buy-In Agreement and the CSA do not appear to have been taken by LuxSCS, but constitute no more than a simple ratification by the sole manager of a decision taken by Amazon group companies in the US. The same can be said for the decision to enter into the License Agreement with LuxOpCo, as it is reflected in the resolution that the decision of the sole manager to approve and execute this agreement on behalf of LuxSCS was taken in the context of the 2006 restructuring of Amazon's European operations (400), which had already been decided by the Amazon group. In any event, such decisions are not active decisions related to the development, enhancement, management, and exploitation of the Intangibles, but are decisions implementing the ‘limited number of legal agreements necessary for the Luxembourg structure to operate’ (401).

(424)

The fact that LuxSCS was not legally entitled to perform such functions by virtue of the License Agreement and the fact that it lacked the capacity to do so, also means that it did not actually perform any of the functions assigned to it under the CSA during the relevant period (402). In other words, LuxSCS was not involved in the development of the Intangibles, nor in budgeting and planning activities related thereto (functions 1 and 4 listed in Table 13, reproducing the functions listed in Exhibit B to the CSA). It was also not involved in sales and marketing activities, strategic planning and quality control, and assurance (functions 2, 3 and 6 listed in Table 13).

(425)

LuxSCS also played no active role in the management of strategic acquisitions of technologies (function 5 listed in Table 13) (403), notwithstanding the fact that a number of those acquisitions were executed on the basis of the CSA. In fact, according to the information provided by Amazon on decisions taken by LuxSCS in relation to other buy-in transactions entered into since 2005, its sole manager merely accepted the contribution of the technologies acquired in exchange for a buy-in payment (404). Those decisions constituted no more than a mere administrative reorganisation of activities, not an active, value-adding management of the acquired technology.

(426)

Finally, although Exhibit B to the CSA lists as a final function the ability to ‘select, hire and supervise employees, contractors and sub-contractors to perform any of the above activities’ (function 7 listed in Table 13), there are no indications that LuxSCS should be considered to have effectively outsourced any of the functions assigned to it under the CSA to another party acting under the instruction and control (i.e. a subcontractor) of LuxSCS (405). Neither the resolutions of the sole manager nor the minutes of the general management meetings demonstrate that any active decisions were taken in that respect. Moreover, the CSA Annual Summary reports record no expenses incurred directly by LuxSCS in the development of the Intangibles that would be capable of entering into the cost sharing pool (406), for instance fees paid for the provision of outsourced activities. Only the entities A9, ATI, and the contract development centres managed by ATI and A9 reported Development Costs (407). Those Development Costs reflect functions performed by or on behalf of those companies, (and risks assumed by those companies) during the relevant period. Those functions therefore cannot be considered as performed by LuxSCS (408).

(427)

Consequently, none of the development functions or other functions related to the Intangibles as carried out by A9, ATI and their Subcontractors with reference to the Buy-In Agreement and the CSA (or the risks related to these functions) can be taken into account as a contribution of LuxSCS to the License Agreement between LuxSCS and LuxOpCo. Rather, those functions should be accounted for as contributions of A9 and ATI under the Buy-In Agreement and the CSA (409). Those agreements, which according to the US Tax Court were remunerated at arm's length by way of the Buy-In Payments and the CSA Payments, are not the subject-matter of this Decision, since they are not covered by the contested tax ruling. The functions performed by A9, ATI and their subcontractors are therefore irrelevant when assessing the remuneration to be paid by LuxOpCo to LuxSCS under the License Agreement, which is the subject-matter of the contested tax ruling.

(428)

In any event, even if LuxSCS could be considered to have outsourced its development functions and risks under the CSA to a Subcontractor within a meaning of that agreement (410), which it cannot, it would not have had the capacity to supervise the execution of those functions, let alone control the performance of those functions and the risks associated with them in the absence of employees (411). In a typical arm's length transaction between independent parties, a licensor that outsources certain IP-related functions would be expected to safeguard the execution of the license agreement through close supervision (412). Moreover, even if the functions of LuxSCS under the CSA were to be considered outsourced to an associated company, here in particular LuxOpCo, such a company would have been entitled to an arm's length remuneration for the services performed, either in the form of a service fee or, as regards LuxOpCo, in the form of a reduction of the royalty rate (413). Despite what Amazon claims (414) the License Fee as endorsed by the contested tax ruling was not reduced corresponding to the functions performed by LuxOpCo in relation to the Intangibles, seeing as LuxSCS incurred no direct costs in relation to those activities, with the exception of some limited external costs which appear to relate to the maintenance of its legal ownership of the Intangibles, which was carried out under the control of LuxOpCo (415).

(429)

During the relevant period, the only functions that could actually have been said to have been performed by LuxSCS were functions related to the maintenance of its legal ownership of the Intangibles, although even those were carried out under LuxOpCo's control (416). According to the detailed break-down of LuxSCS's other operating charges as set out in Table 10, LuxSCS incurred certain external expenses related to domain, accounting and legal fees – general corporate (417). Amazon explained that those fees related to: (i) the share of the Luxembourg costs allocated to LuxSCS; (ii) disbursements in relation to the legal protection of the Intangibles owned by LuxSCS, such as patent application fees and related disbursements, trademark application fees and related disbursements, trademark application fees and related disbursements; and (iii) fees and disbursements in relation to domain names and IP searches (418). It is only those costs that could be considered as relevant for the remuneration of LuxSCS under the License Agreement since those costs appear to reflect functions that might have actually been carried out by LuxSCS during the relevant period.

9.2.1.1.2.   Assets used by LuxSCS

(430)

For transfer pricing purposes, a party to an intra-group transaction can only be attributed a return on an asset to the extent that it exercises control over its use and the risk(s) associated with that use. Thus, the owner of an asset needs to effectively use the asset in question. The determinative factor in every functional analysis is therefore not the assets passively owned by any of the parties to the intra-group transaction under analysis, but the assets actually used (419). The mere legal ownership of an asset, without using it to undertake any functions or incur any risks, does not give rise to any remuneration beyond the value of the asset itself (420). Nor does the mere legal ownership of or license to an asset in itself mean that the owner in fact develops, enhances, manages, or exploits that asset.

(431)

As regards the Intangibles, Amazon argues that LuxSCS ‘uses’ those assets by licensing them to LuxOpCo. However, pursuant to the License Agreement, LuxSCS granted LuxOpCo an exclusive and irrevocable license to the economic exploitation of the Intangibles in Europe and a right to further develop, manage and exploit the Intangibles for their entire lifetime for the purposes of operating Amazon's European retail and service business, without any reservation for LuxSCS to be eligible to still use the Intangibles or to manage and control their use.

(432)

In any event, since LuxSCS did not in fact use, nor did it have the capacity to use, the Intangibles, as explained in Recitals 421 to 427, the Intangibles cannot be said to have been used by LuxSCS in the execution of the License Agreement for transfer pricing purposes.

(433)

Nor can LuxSCS be said to have incurred any costs in relation to the development, enhancement, management and exploitation of the Intangibles (421). As set out in Table 10, LuxSCS did not incur any costs during the relevant period – besides the external fees and disbursements identified in Recital 429 which appear to relate to the maintenance of its legal ownership to the Intangibles, and some one-off costs related to intercompany sale of inventory in relation to the 2006 restructuring – other than the Buy-In and CSA Costs. Moreover, any costs that LuxSCS did incur were financed with its primary source of income, i.e. the royalty payments it received from LuxOpCo (422).

(434)

LuxSCS also does not own any other asset that could be said to contribute to the development, enhancement, management or exploitation of the Intangibles (423). While intangible assets resulting from the purchase of IP are capitalised on LuxSCS's balance sheet since 2011, those acquisitions have been managed and controlled not by LuxSCS, but by Amazon companies in the US and LuxOpCo (424), as explained in Recital 425. The other assets presented on its balance sheets are primarily held in its capacity of sole shareholder of LuxOpCo and one other group entity, Amazon Eurasia Holdings S.a.r.l., Luxembourg. They are not related to the License Agreement, which is the subject matter of the contested tax ruling and this Decision.

(435)

Finally, while LuxSCS provided loans to LuxOpCo out of the profits accumulated from the royalties paid by the latter to the former under the License Agreement (425), the provision of loans does not constitute a valuable contribution to the development, enhancement, management, and exploitation of the Intangibles. As explained in Recital 183 and footnotes 177 to 179, the amount of those loans actually seems to have increased in line with the excessive part of the royalty payments (426), since LuxOpCo retained the portion of the royalty which was not used for the Buy-In and CSA Costs as paid on to A9 and ATI under the CSA (427).

9.2.1.1.3.   Risks assumed by LuxSCS

(436)

The starting point to determine whether a party to an intra-group transaction has assumed economically significant risks is the contractual assumption of risks between the parties to that transaction. However, a party that contractually assumes such risks should be able, on the one hand, to control those risks (operational capacity) (428) and, on the other hand, to financially assume those risks (financial capacity) (429). In this context, control should be understood as the capacity to make decisions to take on the risk and to manage it (430). It is therefore crucial to determine how the parties to the transaction operate in relation to the management of those risks, and in particular which party or parties perform control functions and risk mitigation functions, which party or parties encounter upside or downside consequences of risk outcomes, and which party or parties have the financial capacity to assume those risks (431). When the risk allocation set out in the intra-group contractual arrangement does not reflect the underlying economic reality, it is the parties' actual conduct and not the contractual arrangements that should be taken into account for transfer pricing purposes (432).

(437)

Amazon claims that LuxSCS assumes the risks related to the development, enhancement, management and exploitation of the Intangibles on the basis of the contractual arrangements it entered into with associated group companies, namely the Buy-In Agreement, the CSA and the License Agreement, and its ownership of the Intangibles (433). That claim must be rejected for several reasons.

(438)

First, LuxSCS in fact passed on the risks related to the aforementioned functions to LuxOpCo. Under the License Agreement, not only did LuxSCS grant LuxOpCo an exclusive and irrevocable license to the economic exploitation of the Intangibles in Europe and a right to further develop, manage and protect the Intangibles for their entire lifetime for the purpose of operating Amazon's European retail and service business (434), LuxOpCo also contractually assumed all the risks designated to LuxSCS under the CSA (435).

(439)

Second, as regards the CSA, while Exhibit B thereto lists several risks attributed to LuxSCS (Table 13), those risks are intrinsic to the performance of the functions attributed to it as recorded in that same exhibit. Since LuxSCS does not actually perform any of the functions attributed to it under the CSA, as explained in Recitals 424 to 427, it also cannot be said to have effectively assumed any risks associated with those functions. Nor is there any evidence of any business rationale for such a risk allocation. Since LuxOpCo took over all the functions related to the development, enhancement, management and exploitation of the Intangibles in the European territory by way of its exclusive license, LuxSCS would not be able to manage and control the risks related to those activities (436).

(440)

Third, there is equally no evidence suggesting that LuxSCS took any active decisions to outsource its risk management functions under the CSA, nor that LuxSCS would have been able to control and supervise such outsourced activities had it done so (437). Similarly, none of risks related to the Intangibles, as undertaken by A9, ATI or their subcontractors, with reference to the CSA could be taken into account as a risk assumed by LuxSCS in the licensing arrangement between LuxSCS and LuxOpCo. As explained in Recitals 426 and 427, the other parties to the CSA are not acting as agents of LuxSCS, but on their own behalf in order to achieve the anticipated benefits of the CSA. Those risks should be accounted for as contributions of those parties to the CSA and they cannot affect the remuneration of LuxSCS by LuxOpCo under the License Agreement.

(441)

Fourth, that LuxSCS assumed no risks in relation to the Intangibles is further supported by the fact that neither the resolutions of LuxSCS's sole manager nor the minutes of its general meetings reflect any critical decisions on risk management performed by LuxSCS in relation to the risks associated with the development, enhancement, management, and exploitation of the Intangibles (438). In any event, LuxSCS had no employees which could have performed such risk management functions during the relevant period. LuxSCS therefore lacked the operational capacity to assume any risks contractually assigned to it (439).

(442)

Amazon further claims that LuxSCS bore the business risks associated with Amazon's European retail operations due to the fact that online retailing is based and heavily reliant on the Technology (i.e. an element of the Intangibles) (440), which LuxSCS makes available to LuxOpCo pursuant to the License Agreement. That claim is not supported by the contractual allocation of risks under the License Agreement, pursuant to which LuxSCS does not assume any risks associated with the exploitation of the Intangibles. Instead, it is LuxOpCo, to whom the Intangibles have been exclusively and irrevocably licensed, that is responsible for the strategic decision-making related to Amazon's European retail operations and who, in accordance with the contractual allocation, is actually taking those decisions (441). LuxSCS therefore cannot be said to have assumed any significant operating risks in relation to the use of Intangibles for the purpose operating that business. For instance, LuxSCS did not bear consumer credit risks or bad debt risks, since it did not deal directly with payments by clients; it did not bear warehousing risks, since it did not hold any inventory; and it did not bear any warranty risks or product liability risks on the products sold, since it did not sells any products. In sum, LuxSCS did not exercise any functions pertaining to those risks, nor any control over those functions during the relevant period.

(443)

Amazon also claims (442) that LuxSCS assumed financial risks associated with the development of the Intangibles, in particular resulting from its obligation under the CSA to pay its share of the Development Costs, which is calculated as the proportion of sales revenue generated by Amazon in Europe as compared to Amazon's global sales revenue (443). Due to the contractual arrangements under License Agreement, explained in Recital 438, the only identifiable risk left with LuxSCS was that it needed to honour its obligation under the CSA to pay the Buy-In and CSA Costs to Amazon US. While LuxSCS might not be able to pay those costs in a situation where LuxOpCo would go bankrupt or otherwise permanently be unable to pay a level of royalty sufficient to cover those costs to LuxSCS, this contractual risk appears to have been left with LuxSCS solely because it was ‘necessary for the Luxembourg structure to operate’ (444). It does not reflect economic reality. Had the contractual arrangement, and in particular the methodology for the royalty determination, reflected economic reality and the true risk allocation between the parties (445), LuxSCS would have received a remuneration covering its limited functions only (446), and would not have borne any risk of losses (447). As explained in the preceding Recital, LuxSCS did not take any active decisions to limit or manage this specific risk, nor did it have control over such risk. In any event, had LuxOpCo gone bankrupt or otherwise permanently unable to pay to LuxSCS the royalties owed to it under the License Agreement, LuxSCS could, in that specific event, have terminated the License Agreement and licensed the Intangibles to another related or independent party and thereby limit its contractual risk (448).

(444)

Most important, during the relevant period LuxSCS did not carry out any functions in relation to, nor did it have control over or the capacity to control, the two main input parameters for the calculation of the Buy-in and CSA Costs. The level of those payments are determined, on the one hand, by the level of costs incurred as a result of Buy-in and the development of the Intangibles (the Development Costs) and, on the other, by the level of sales in Europe (449). It was ATI and A9 that determined and controlled the Development Costs and LuxOpCo that controlled the level of sales in Europe. As regards the latter, it is LuxOpCo that took all strategic decisions concerning Amazon's European retail business (450), which affected the level of sales revenue generated in Europe. Thus, only LuxOpCo could influence its ability to pay a royalty to LuxSCS, which was determined by the level of profit generated from the operation of Amazon's European online retail business.

(445)

In addition, LuxSCS did not have the financial capacity to finance the Buy-In and CSA Costs on its own behalf, since it was only in a position to finance those costs because of the funding received in the form of royalty payments from LuxOpCo (451). The cash disbursements actually made by LuxOpCo to LuxSCS in this regard seem to have been just sufficient to cover the necessary payments to be made by LuxSCS, including the Buy-In and CSA costs, while the cash related to LuxSCS's income in excess of Buy-In and CSA costs was kept and managed by LuxOpCo (452). The initial capital of LuxSCS of about EUR [400-500] million is irrelevant in this context. As explained in Recital 443, in an arm's length arrangement LuxSCS would not need to absorb losses, so its capital would not be at any risk. Not only was its initial capital insufficient to cover the Buy-In and CSA costs, since the CSA Payments alone totalled on their own EUR [1 000 – 1 500] million over the period 2006 to 2013 (453), that capital was provided to LuxSCS by its shareholders in 2005, which was before LuxOpCo started operating and making royalty payments to LuxSCS and before the relevant period covered by the contested tax ruling and this Decision. In any event, LuxSCS did not effectively perform any critical functions nor assume any substantial risks in relation to the development, enhancement, management, or exploitation of the Intangibles, neither as regards the activities carried out by ATI and A9 under the CSA, nor as regards the development activities carried out by LuxOpCo.

(446)

Consequently, LuxSCS cannot be said to have effectively assumed the risks associated with the development, enhancement, management, and exploitation of the Intangibles, nor did it have the financial capacity to assume such risks.

9.2.1.1.4.   Conclusion on the functional analysis of LuxSCS

(447)

A functional analysis of LuxSCS demonstrates that during the relevant period it was not entitled to perform, it did not perform or outsource, nor did it have the capacity to perform or outsource, any unique and valuable functions in relation to the development, enhancement, management, and exploitation of the Intangibles. It further demonstrates that during that period, LuxSCS did not use any assets in relation to those activities, but merely held the ownership and license to the Intangibles with reference to the CSA, nor did it assume, effectively control or have the operational and financial capacity to assume or control the risks associated with those activities. In reality, LuxSCS could at most be said to have performed certain functions necessary to the maintenance of its legal ownership to the Intangibles, as detailed in Recital 428.

9.2.1.2.    Functional analysis of LuxOpCo

(448)

In Section 9.2.1.2.1, the Commission will assess the functions performed by LuxOpCo in relation to the Intangibles. In Section 9.2.1.2.2, it will assess the functions performed by LuxOpCo in relation to the operation of Amazon's European retail and service business. In Section 9.2.1.2.3, it will assess the assets used by LuxOpCo in the performance of both sets of functions. In Section 9.2.1.2.4, it will assess the risks assumed by LuxOpCo in the performance of both sets of functions.

9.2.1.2.1.   Functions performed by LuxOpCo in relation to the Intangibles

(449)

Amazon claims that ‘LuxOpCo did not contribute to the creation, acquisition, management, deployment, or strategic direction of the [Intangibles] during the period under review’ (454). Based on the information the Commission has reviewed, that claim must be rejected. Not only was LuxOpCo entrusted with performing unique and valuable functions in relation to the Intangibles as a result of the License Agreement, the functions actually performed by LuxOpCo during the relevant period went far beyond their mere exploitation and included the development, enhancement and management of the Technology through independent European technological and business innovations, the creation and management of Customer Data, and the development and maintenance of Amazon's Trademark in Europe.

(450)

As explained in Recital 419, LuxSCS granted LuxOpCo an exclusive and irrevocable license to the economic exploitation of the Intangibles and all other IP held by LuxSCS (455) in Europe and a right to further develop and enhance (456), maintain (457), and protect (458) the Intangibles for their entire lifetime (459). LuxSCS retains the ownership to the Intangibles and Derivative Works created by LuxOpCo and its sublicensees (460). LuxOpCo was further granted the exclusive and irrevocable right to decide if – and to whom – the Intangibles may be sublicensed (461). In this regard, LuxOpCo managed the sub-license relationships, in particular with AMEU and ASE.

(451)

During the relevant period, LuxOpCo actively performed the aforementioned functions, both in a general manner and as regards each of the three components of the Intangibles: Technology, Customer Data and Trademarks, as explained in more detail in Recitals 452 to 472.

(a)   The IP Steering Committee

(452)

As a general matter, the minutes of LuxOpCo's manager meetings record activities directly related to the development, maintenance and management of the Intangibles, in particular the setting up of an ‘EU IP Steering Committee’ (462) whose role was ‘to provide technical and business guidance and assistance in strategic decision making with regard to the development of intellectual property of all types and descriptions held by the Company's parent, Amazon Europe Holding Technologies SCS’, or entering into several licensing agreements with third parties (463).

(453)

Amazon's EU Policies and Procedures Manual defines the purpose of the IP Steering Committee as follows: ‘An EU IP Steering Committee has been created for the purpose of providing technical and business guidance with regard to the development and deployment of Amazon's intellectual property in Europe’. That manual further provides that ‘[t]he Committee shall meet […] to review Amazon's EU IP portfolio, business strategy as it relates to the development and deployment of intellectual property and any other matters related to intellectual property that the Committee deems appropriate’. According to that manual, the following representatives must be present at each IP Steering Committee meeting: ‘[t]he members of the Committee shall include: Vice President of EU Services; EU Legal Director (employed by Amazon EU Sarl); Amazon IP Counsel (TBD), Vice President, European Operations. The Committee may include additional members, based in Luxembourg or elsewhere, including a representative employee of an EU Development Center’ (464). The IP Steering Committee met at least annually to exchange, discuss and decide on the management and protection of IP in Europe.

(454)

Amazon insisted that ‘the IP Steering Committee was an advisory body […]. It did not take any decisions in relation to the development or the enhancement of the intangibles assets’ and that the importance of that committee should therefore not be overstated. However, the fact that the Committee was an advisory body does not mean that its recommendations did not impact on the development, maintenance and management of the Intangibles. In fact, according to Amazon itself, the activities of the IP Steering Committee consisted of: ‘(i) making recommendations on filings to protect the intangibles (and thereby LuxOpCo's exclusive rights under the license agreement between LuxSCS and