15.6.2018   

EN

Official Journal of the European Union

L 153/1

(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.

(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).

(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

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

(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).

(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.

(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).

(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).

(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.

(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):

(128)

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

(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).

(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).

(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).

(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.

(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)

(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).

(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

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

(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.

(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.

(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).

(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).

(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).

(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:

(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.

(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

(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

(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

(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

(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

(188)

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

Table 8

Break-down of the Intercompany costs

(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).

(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

(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

(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.

(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

(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

(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

(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.

(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).

(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.

(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).

(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

(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.

(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)

Table 16

Sales commissions paid by [A]

(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.

(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).

(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:

(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.

(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.

(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.

(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.

(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).